Management Accounting Chapter 4

FUNDS FLOW STATEMENT

MEANING OF FUND:
It means working capital. Working capital is the excess of current assets over
current liabilities.
MEANING OF FLOW OF FUND:
It means the change in working capital. It indicates the inflows and outflows of
funds.
FUNDS FLOW STATEMENT:
It is a financial report on movements of funds explaining from where the funds
originate and where it is used during the period. This statement consists of two
parts- Sources of funds and Application of funds. The basic object of this statement
is to find out increase or decrease in working capital during a period by showing
sources and uses of working capital.
PREPARATION OF FUNDS FLOW STATEMENT:
Generally, fund flow requires preparation of three statements:
1. Statement showing the changes in working capital
2. Funds flow statement
3. Profit and loss adjustment account (optional)
STATEMENT SHOWING CHANGES IN WORKING CAPITAL/SCHEDULE
OF CHANGES IN WORKING CAPITAL/ ANALYSIS OF WORKING
CAPITAL:
Proforma:
Particulars
P Y C Y Increase in Decrease in
amt
amt
WC
WC
Current assets:
Cash
Bank
Bills receivables
Debtors
Temporary investments
Stock
Prepaid expenses
Outstanding income (etc)
TOTAL CURRENT ASSETS

(A)
Current liabilities:
Bills payables
Creditors
Outstanding expenses
Bank overdraft
Short term advances (etc)
TOTAL
CURRENT
LIABILITIES (B)
WORKING CAPITAL (A) (B)
Net increase or decrease in
working capital
(to be transferred to FFS)
Total
Remember:
1. Consider only the balance sheets for preparation of this statement and ignore all
the additional information.
2. For current assets increase in assets means increase in working capital and
decrease in assets means decrease in working capital. Similarly for current
liabilities increase in liabilities means decrease in working capital and decrease in
liabilities means increase in working capital.
PROFIT AND LOSS ADJUSTMENT ACCOUNT:
Proforma:
Particulars
Debit
Particulars
Credit
amount
amount
To depreciation
By opening balance of P&L
A/C
To share discount written
By dividend received
off
To goodwill written off
By excess provision written
back
To
premium
of
By funds from operations
redemption
(bal fig)
(to be transferred to FFS)
To transfer to general
reserve
To transfer to other

reserves
To loss on sale of fixed
assets
To tax provision
To dividend provision
To closing balance of
P&L A/C
Total
Total
Remember:
1. P&L Adjustment account is not the part of the FFS but it is necessary to prepare it
to calculate the amount of FFO. It is not the integral part of the main answer and
can be shown in the working notes also.
2. It can be prepared in the statement form also.
3. Opening and closing balances are taken from the balance sheet liability side Profit
and Loss Appropriation Account.
FUNDS FLOW STATEMENT:
Proforma:
Sources of funds
Amoun Application of funds
Amoun
t
t
Funds from operation (cr
Funds from operation (dr bal)
bal)
Issue of equity shares
Redemption
of
preference
shares
Issue of debentures
Redemption of debentures
Issue of preference shares
Repayment of long term
borrowings
Long term borrowings
Purchase of fixed assets
Sale of fixed assets
Premium on redemption
Premium on issue
Net increase in WC
Net decrease in WC
Total
Total