Funds Flow Statement

Funds Flow Statement

🟢 Lite — Quick Review (1h–1d)

Rapid summary for last-minute revision before your exam.

Funds Flow Statement (Statement of Changes in Financial Position) reconciles opening and closing working capital (Current Assets − Current Liabilities) by listing sources (funds obtained) and applications (funds spent) during the period.

Key formula:

• FFO = Net Profit + Depreciation + Loss on Asset Sale − Gain on Asset Sale

Sources of Funds: Share issues, debenture issues, long-term borrowings, disposal of non-current assets, Funds from Operations (FFO).

Applications of Funds: Dividend paid, tax paid, purchase of non-current assets, loan repayment, share buyback.

High-yield exam pointers:

1. Depreciation is added back to PAT because it’s a non-cash charge — never a cash source.
2. Current asset increases and current liability decreases are applications (funds used).
3. The statement must balance — any difference appears as a bank/overdraft reconciling item.

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🟡 Standard — Regular Study (2d–2mo)

Standard content for students with a few days to months.

What is a Funds Flow Statement?

The Funds Flow Statement explains how working capital moved between the beginning and end of an accounting period. It identifies where funds came from (sources) and where they went to (applications). The fundamental equation is:

Sources = Applications

Working Capital

Working Capital = Current Assets − Current Liabilities. An increase in working capital is an application (funds tied up); a decrease is a source (funds released).

Deriving FFO (Funds from Operations)

FFO converts the accounting profit into actual funds generated:

Item	Treatment
Profit After Tax (PAT)	Starting point
Depreciation/Amortisation	Add back (non-cash)
Loss on disposal of NCA	Add back
Gain on disposal of NCA	Subtract
Any other non-fund items	Adjust accordingly

Format of the Statement

1. Schedule of Changes in Working Capital — shows CA and CL movements.
2. Funds from Operations — PAT ± non-fund adjustments.
3. Sources and Applications — list items, total must balance.
4. Balancing figure — typically bank/overdraft.

IAS 7 Cash Flow Statement Connection

Under IAS 7, the indirect method mirrors FFO logic: start with PAT, adjust for non-cash items, then working capital movements. ACCA/CA Pakistan questions often test both formats — remember that dividend paid appears in financing activities (IAS 7) but as an application in FFO format.

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🔴 Extended — Deep Study (3mo+)

Comprehensive coverage for students on a longer study timeline.

Sources vs Applications — Classification Table

Source (Fund Provider)	Application (Fund User)
Issue of equity shares	Dividend paid
Issue of debentures	Tax paid
Long-term borrowing received	Purchase of non-current assets
Disposal of non-current assets	Repayment of long-term loans
Decrease in current assets	Increase in current assets
Increase in current liabilities	Decrease in current liabilities

Common Mistakes to Avoid

1. Depreciation as a source: Students incorrectly treat depreciation as cash received. It is merely a non-cash expense added back to compute FFO — no cash movement occurs.
2. Omitting tax and dividends: Both are applications of funds even though they originate from the P&L. Tax paid and dividend paid must appear separately.
3. Classifying current items backwards: A rise in debtors is an application (cash tied up); a rise in creditors is a source (more funding received). Reverse for decreases.
4. Confusing FFO with net cash: FFO includes non-cash charges but excludes working capital movements — net cash from operations (IAS 7) incorporates all working capital changes.

Link to IAS 7 Cash Flow Statement

The Cash Flow Statement (IAS 7) is the modern successor to the Funds Flow Statement. Under the indirect method: Operating Cash Flow = PAT + Depreciation ± Gains/Losses ± Working Capital changes. The direct method shows: Cash from Customers − Cash to Suppliers − Cash to Employees. Financing activities only include equity dividends paid, not corporation tax.

Practice Prompts

1. A company has PAT of Rs 500,000, depreciation Rs 80,000, gain on sale of machinery Rs 20,000, tax paid Rs 60,000, dividend paid Rs 40,000. Prepare the FFO calculation and the sources-and-applications format.
2. Explain why depreciation is added back to PAT in the FFO calculation but does not represent a source of cash.

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