What is Fund Flow Statement Preparation?

S7-SA7-0631

Grade Level:

Class 12

AI/ML, Physics, Biotechnology, FinTech, EVs, Space Technology, Climate Science, Blockchain, Medicine, Engineering, Law, Economics

Definition

What is it?

Fund Flow Statement Preparation is like creating a report that shows how money (funds) moved in and out of a business over a period. It helps understand where a business got its money from and where it spent that money, focusing on changes in working capital.

Simple Example

Quick Example

Imagine your pocket money. At the start of the month, you have ₹500. You get ₹200 from your parents, spend ₹100 on snacks, and save ₹50. A fund flow statement for your pocket money would show the ₹200 coming in and the ₹100 going out, explaining how your total money changed.

Worked Example

Step-by-Step

Let's prepare a simple Fund Flow Statement from two balance sheets.

Balance Sheet as on March 31, 2022:
Assets: Cash ₹10,000, Stock ₹20,000, Machinery ₹50,000
Liabilities: Creditors ₹15,000, Capital ₹65,000

Balance Sheet as on March 31, 2023:
Assets: Cash ₹12,000, Stock ₹18,000, Machinery ₹60,000
Liabilities: Creditors ₹10,000, Capital ₹80,000

---Step 1: Calculate Change in Working Capital (Current Assets - Current Liabilities).
2022: Current Assets (Cash + Stock) = ₹10,000 + ₹20,000 = ₹30,000. Current Liabilities (Creditors) = ₹15,000. Working Capital = ₹30,000 - ₹15,000 = ₹15,000.
2023: Current Assets (Cash + Stock) = ₹12,000 + ₹18,000 = ₹30,000. Current Liabilities (Creditors) = ₹10,000. Working Capital = ₹30,000 - ₹10,000 = ₹20,000.

---Step 2: Calculate Increase in Working Capital.
Increase in Working Capital = ₹20,000 (2023) - ₹15,000 (2022) = ₹5,000.

---Step 3: Identify Sources of Funds (e.g., Issue of Shares, Sale of Fixed Assets, Funds from Operations).
Increase in Capital = ₹80,000 (2023) - ₹65,000 (2022) = ₹15,000 (Source).
Increase in Machinery (Purchase) = ₹60,000 (2023) - ₹50,000 (2022) = ₹10,000 (Application).

---Step 4: Assume the increase in Capital is 'Funds from Operations' if no other details are given for new shares/loans.

---Step 5: Prepare the Fund Flow Statement.
Sources of Funds:
Funds from Operations (Increase in Capital) = ₹15,000

Applications of Funds:
Purchase of Machinery = ₹10,000
Increase in Working Capital = ₹5,000

Total Sources = ₹15,000
Total Applications = ₹15,000

Answer: The Fund Flow Statement shows total sources of ₹15,000 and total applications of ₹15,000, with an increase in working capital of ₹5,000.

Why It Matters

Understanding fund flow helps businesses manage their money better, just like you manage your pocket money. People in FinTech use this to analyze company health, and even engineers managing big projects need to track fund flow for project budgeting. This skill is vital for careers in finance, economics, and business management.

Common Mistakes

MISTAKE: Confusing fund flow with cash flow. | CORRECTION: Fund flow focuses on changes in working capital (current assets minus current liabilities), while cash flow focuses only on actual cash movements.

MISTAKE: Not preparing a 'Schedule of Changes in Working Capital' first. | CORRECTION: Always start by calculating the change in each current asset and current liability to find the net increase or decrease in working capital.

MISTAKE: Treating all increases in liabilities as sources of funds and all decreases as applications. | CORRECTION: Only long-term liabilities (like debentures issued) are sources. Short-term liabilities affect working capital, not the fund flow directly as a source/application.

Practice Questions

Try It Yourself

QUESTION: If a company sells an old machine for ₹50,000, is this a source or application of funds? | ANSWER: Source of Funds.

QUESTION: A company's current assets increased from ₹1,00,000 to ₹1,20,000, and current liabilities increased from ₹40,000 to ₹45,000. Calculate the change in working capital. | ANSWER: Working Capital 2022 = ₹1,00,000 - ₹40,000 = ₹60,000. Working Capital 2023 = ₹1,20,000 - ₹45,000 = ₹75,000. Increase in Working Capital = ₹75,000 - ₹60,000 = ₹15,000.

QUESTION: A business issued new shares worth ₹2,00,000 and purchased a new building for ₹1,50,000. Its working capital increased by ₹50,000. Prepare a simple Fund Flow Statement showing total sources and applications. | ANSWER: Sources: Issue of Shares = ₹2,00,000. Applications: Purchase of Building = ₹1,50,000, Increase in Working Capital = ₹50,000. Total Sources = ₹2,00,000. Total Applications = ₹2,00,000.

MCQ

Quick Quiz

Which of the following is considered an application of funds?

Issue of debentures

Sale of fixed assets

Redemption of preference shares

Funds from operations

The Correct Answer Is:

Redemption of preference shares means paying back money, which is an outflow or application of funds. Issue of debentures, sale of fixed assets, and funds from operations are all sources of funds.

Real World Connection

In the Real World

Big companies like Tata Motors or Reliance Industries regularly prepare fund flow statements. Financial analysts working for banks or investment firms in Mumbai use these statements to decide whether to invest in a company or lend it money. It's a key tool for understanding a company's financial health over time, not just at one point.

Key Vocabulary

Key Terms

FUNDS: Money or financial resources available for use | WORKING CAPITAL: The difference between current assets and current liabilities, showing a company's short-term liquidity | SOURCES OF FUNDS: Ways a business gets money (e.g., issuing shares, selling assets) | APPLICATIONS OF FUNDS: Ways a business spends or uses money (e.g., buying assets, paying debts) | BALANCE SHEET: A financial statement showing a company's assets, liabilities, and owner's equity at a specific point in time.

What's Next

What to Learn Next

Now that you understand fund flow, you should learn about Cash Flow Statement Preparation. It's similar but focuses purely on cash movements, giving you another powerful tool to analyze a business's financial health!