Funds Flow Statement

Funds Flow Statement

🟢 Lite — Quick Review (1h–1d)

Funds Flow Statement (Statement of Changes in Financial Position) explains how working capital changed between two balance sheet dates by showing sources and applications of funds. Only non-current items create fund flow; current items affect working capital but not fund flow.

Key Formula: Working Capital = Current Assets − Current Liabilities

Funds from Operations = Net Profit + Depreciation + Amortisation + Loss on Sale of Fixed Assets + Provision for Doubtful Debts

Sources of Funds: Issue of share capital, issue of debentures, sale of fixed assets, raising long-term loans, fund from operations.

Applications of Funds: Redemption of debentures, repayment of long-term loans, purchase of fixed assets, payment of dividend, payment of tax.

Exam pointers: Watch for the distinction between profit and funds from operations—depreciation is added back (non-cash). Bank overdraft is a non-current liability, excluded from working capital. Profit on sale of fixed assets is deducted; loss is added back. Always prepare three schedules: Statement of Changes in Working Capital, Sources, and Applications.

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🟡 Standard — Regular Study (2d–2mo)

What is a Funds Flow Statement?

A Funds Flow Statement is a financial statement that analyses the movement of funds (working capital) into and out of a business during an accounting period. It bridges two consecutive balance sheets, revealing where funds came from and where they were deployed. Unlike a Cash Flow Statement, it is prepared on an accrual basis, capturing economic events regardless of when cash moves.

Core Mechanism

The statement operates on the sources and applications principle: every increase in working capital is an application; every decrease is a source.

Step 1 — Statement of Changes in Working Capital Compare current assets and current liabilities at the beginning and end of the period to compute the net change in working capital.

Step 2 — Compute Funds from Operations This is the most-tested calculation in CA Foundation:

Item	Treatment
Net Profit	Take from P&L A/c
Depreciation	Add back (non-cash expense)
Amortisation of intangible assets	Add back (non-cash)
Loss on sale of fixed assets	Add back
Profit on sale of fixed assets	Deduct
Provision for doubtful debts	Add back
Goodwill written off	Add back

Step 3 — List Sources and Applications

Sources: Issue of equity/debenture capital, sale of non-current assets, long-term loan borrowed, funds from operations.

Applications: Redemption of capital, purchase of non-current assets, repayment of long-term loans, dividend paid, tax paid.

Common Exam Traps

1. Using net profit directly as funds from operations — wrong; must add back non-cash items.
2. Treating bank overdraft as a current liability for working capital — it is a non-current liability.
3. Forgetting to adjust profit or loss on sale of fixed assets.
4. Missing tax paid and dividend paid in the applications column.

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🔴 Extended — Deep Study (3mo+)

Three-Part Structure of the Funds Flow Statement

The statement has three integral parts that must be presented in sequence:

Part 1 — Statement of Changes in Working Capital Lists each current asset and current liability at the beginning and end of the period, showing the increase or decrease in each. Net change = change in working capital.

Part 2 — Sources of Funds Shows all inflows of funds during the period. Funds from operations is the most important internal source, computed by adjusting net profit for all non-cash and non-operating items.

Part 3 — Applications of Funds Shows all outflows of funds. Payment of dividend and income tax are always applications even if they are shown as transfers in the balance sheet.

Net Profit Available for Preference Dividend

When preference shares exist, calculate: Net Profit Available for Preference Dividend = Profit after Tax − Profit transferred to General Reserve + Debenture Interest Written Off

This appears as an adjustment when preference dividend is declared.

Linkages to Adjacent Topics

• Cash Flow Statement: Both analyse financial changes, but Cash Flow is cash-specific; Funds Flow is accrual-based and broader.
• Balance Sheet: Funds Flow uses two consecutive balance sheets as its starting point.
• Depreciation Accounting: Every depreciation question in Funds Flow tests whether you understand it is a non-cash charge requiring add-back.

Common Mistakes

1. Treating an increase in a current liability as a source — it is actually a source of funds because it increases working capital.
2. Treating depreciation as a source of funds — it is an add-back to profit, not a cash inflow.
3. Including provision for taxation in applications when it has not been paid — only actual payment is an application.

Practice Prompts

1. From the following data, compute Funds from Operations: Net Profit ₹50,000; Depreciation ₹8,000; Goodwill Written Off ₹3,000; Loss on Sale of Machinery ₹2,000; Provision for Doubtful Debts ₹1,500.
2. Prepare a Funds Flow Statement given: Equity capital issued ₹2,00,000; 10% Debentures redeemed ₹50,000; Machinery purchased ₹1,20,000; Dividend paid ₹30,000; Tax paid ₹20,000; Depreciation charged ₹15,000. Closing Working Capital exceeds Opening Working Capital by ₹25,000.

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