The fund flow statement depicts a change in working capital. It will, therefore, be better to prepare first a schedule of changes in working capital before preparing a fund flow statement. So, let’s know how to prepare fund flow statement.
Schedule of Changes in Working capital: The schedule of changes in working capital can be prepared by comparing the current assets and the current liabilities of two periods. It may be in the following form:
Schedule of Changes in Working Capital
| Increase Assets|
Net Increase/decrease in Working Capital:
Rules for preparing the schedule
- An increase in current assets results in an increase (+) in “working capital”.
- A decrease in the current asset results in a decrease (-) in “working capital”.
- An increase in current liability results in a decrease (-) in “working capital”.
- A decrease in current liability results in an increase (+) in “working capital”.
How to prepare a fund flow statement?
Fund flow statement: While preparing a Funds Flow Statement, current assets and current liabilities are to be ignored. Attention is to be given to changes in Fixed Assets and Fixed Liabilities. The statement may be prepared in the following form:
Funds flow statement
Source of Funds
Issue of shares …..
Issue of debentures …..
Long-term borrowings …..
Sale of fixed assets …..
Operating profit …..
Total Sources …..
Application of Funds
Redemption of redeemable preference shares …..
Redemption of debentures …..
Payment of other long-term loans ……
Purchase of fixed assets ……
Operating loss ……
Payment of dividends, tax, etc. .…..
Total Uses .…..
Net increase/decrease in working capital
(Total Sources-Total Uses) ..…..
The fund flow statement helps the financial analyst is having a more detailed analysis and understanding of changes in the distribution of resources between two balance sheet dates.
The changes which have taken place in the various items have to be summarized. The statement reclassifies the material into two principal groups:
- Sources of funds, and
- Application or uses of funds.
Sources of funds are indicated in liabilities including the shareholder’s capital. Application of funds, indicated by an increase in assets and/or decrease, serves two principal purposes:
- As a means of analyzing what has happened in the past,
- As a means of planning what is expected to happen in the future. As a tool of historical analysis, the statement reviews the record of the past financial policies pursued by the company.
As a tool of planning, projected funds flow statements can be prepared on the basis of estimates of future sources and the application of funds according to the plans of a business unit.
Hope you find all the necessary information for how to prepare fund flow statement otherwise please comment below.
You May Like Also: