Fund Flow Statement

A firm shows a profit of ₹1,40,000, yet it bought a machine, repaid a loan and paid a dividend. Where did the money come from, and where did it go? A fund flow statement answers that, but first it needs an exact meaning of ‘funds’.

The rule. Working capital changes only when a transaction touches one current account and one non-current account. If both accounts are current, working capital merely shifts inside itself. If both are non-current, it is not touched.

Where each account sits. Current: stock, debtors, bills receivable, cash, prepaid expenses, short-term investments, creditors, bills payable, outstanding expenses, dividend payable and short-term loans. Non-current: share capital, reserves, the profit and loss balance, debentures, long-term loans, fixed assets, goodwill and long-term investments.

Don’t confuse funds with cash. Cash is only one part of working capital. Selling goods on credit raises working capital but not cash, and paying a creditor lowers cash without changing working capital. That difference is why the cash flow statement (Chapter 6) was added.

Where it breaks. The treatment of some items varies by textbook. A provision for tax, or a proposed dividend, may be treated as a non-current appropriation or as a current liability. Follow the treatment the question states. The statement also ignores non-cash tactics that move funds without a visible entry.

For exams. State the meaning of funds as working capital, and decide each transaction by whether it crosses between current and non-current.

Cross the line, move the funds; stay in the box, no flow.

Narmada Plastics’ working capital was ₹2,50,000 last March and is ₹3,00,000 this March. The first job is to see which current items made up that ₹50,000 rise.

The last two columns show the effect on working capital, not the direction of the item. A rise in creditors sits in the right-hand column because it lowers working capital.

The four rules.

• A rise in a current asset raises working capital.
• A fall in a current asset lowers it.
• A rise in a current liability lowers it.
• A fall in a current liability raises it.

Here stock rises by ₹40,000 and debtors by ₹30,000, which add ₹70,000. Cash falls by ₹10,000, and creditors rise by ₹10,000, which together take away ₹20,000. The net is ₹50,000.

Don’t mix up the direction for liabilities. A liability that grows is money a supplier is lending, which sounds like a gain but is a claim to be paid soon. It reduces the net current assets left over, so working capital falls. Most mistakes in this schedule come from reversing this one rule.

Where it breaks. The schedule only explains the total. It does not say why working capital rose. That is the job of the statement of sources and applications, and the two must agree to the rupee.

For exams. Present the schedule first, with last year’s and this year’s balances side by side, and carry its net result to the funds statement as a check.

Assets up, working capital up. Liabilities up, working capital down.

Working capital rose by ₹50,000. Which long-term decisions caused it? Narmada raised money, sold a machine, bought another, repaid a loan and paid a dividend, and each of these needs to be placed on one side or the other.

Funds from operations. This is the main internal source. Start with profit and add back charges that used no working capital (depreciation, goodwill written off, losses on sale of fixed assets), then deduct any gains on such sales, which are shown separately. Here, taxes are paid in the year they are charged.

The sources total ₹3,00,000 and the applications ₹2,50,000. The balance, ₹50,000, is the increase in working capital, and it agrees with the schedule of the previous concept.

Usual sources. Funds from operations, issue of shares or debentures, long-term borrowing, and the sale of fixed assets or long-term investments. Usual applications. Purchase of fixed assets or investments, redemption of debentures or preference shares, repayment of long-term loans, payment of dividends, and a net loss from operations.

Don’t treat depreciation as a source of funds. Depreciation is added back only because it was deducted without using any working capital. The cash does not come from depreciation; it comes from sales. Adding it back stops profit from being understated as a measure of funds from operations.

Where it breaks. The statement does not report how cash itself moved, so it cannot show a looming shortage. In practice, companies covered by the accounting standards present a cash flow statement; the fund flow statement is a management and exam tool, so check the current rules for any firm.

For exams. Show the working: funds from operations first, then sources and applications, then the check that the difference equals the schedule’s result.

Long-term in is a source, long-term out is an application; the gap is working capital.