Funds Flow Statement

🟢 Lite — Quick Review (1h–1d)

Rapid summary for last-minute revision before your exam.

The Funds Flow Statement explains how the working capital of an entity moved between two balance sheet dates by listing every source and application of funds. “Funds” here means net working capital, not cash.

The single most-tested formula:

Funds = Current Assets − Current Liabilities (₦)

Two working statements must be prepared before the main statement: a Schedule of Changes in Working Capital and a Funds from Operations reconciliation.

Item	Treatment
Depreciation	Add back to net profit (non-cash charge)
Proposed dividend	Added back to NP, then shown as application if paid
Profit on sale of fixed asset	Deduct from NP
Transaction within current assets/liabilities	Excluded (no working-capital change)

Exam pointer: ICAN typically awards 10–15 marks for preparing both the schedule and the statement from given trial balances.

🟡 Standard — Regular Study (2d–2mo)

Standard content for students with a few days to months.

Definition and Scope

A Funds Flow Statement is a financial statement that summarises the movement of funds, defined as net working capital, between two balance sheet dates. It reveals where funds came from (sources) and where funds went (applications), thereby explaining the change in working capital position during an accounting period.

Schedule of Changes in Working Capital

This schedule is the first working paper. Each current asset and current liability for the opening and closing balance sheets is listed, and the net increase or decrease in working capital is computed.

Funds from Operations (FFO)

FFO is the operating source of funds derived from the profit and loss account. The reconciliation removes items that do not represent movement of working capital or that are non-operating in nature.

FFO = Net Profit + Non-cash charges − Non-operating incomes + Non-operating expenses

Non-cash charges include depreciation, amortisation, and provision for doubtful debts. Non-operating items include profit or loss on sale of fixed assets and goodwill written off.

Sources and Applications

Sources of Funds	Applications of Funds
Issue of shares	Redemption of share capital
Raising of long-term loans	Repayment of long-term loans
Sale of non-current assets	Purchase of non-current assets
Funds from operations	Payment of dividends and tax
Decrease in working capital	Increase in working capital

Exclusion Principle

Transactions affecting only current assets (e.g., cash received from debtors) or only current liabilities (e.g., creditors paid by cheque) are excluded because they leave net working capital unchanged. Likewise, conversion of one current liability into another current liability is ignored.

Key Working Capital Identity

Change in Working Capital = Closing Working Capital − Opening Working Capital

If sources exceed applications, working capital increases; if applications exceed sources, working capital decreases.

🔴 Extended — Deep Study (3mo+)

Comprehensive coverage for students on a longer study timeline.

Worked Mini-Example

Suppose Net Profit = ₦500,000; Depreciation = ₦80,000; Goodwill written off = ₦40,000; Profit on sale of equipment = ₦30,000; Loss on sale of vehicle = ₦20,000; Proposed dividend = ₦60,000.

Funds from Operations = 500,000 + 80,000 + 40,000 − 30,000 + 20,000 = ₦610,000

Proposed dividend is added back to net profit (it is an appropriation, not an expense) and then separately disclosed as an application when paid.

Common Traps Examiners Set

Treating bank overdraft as a non-current liability — only the non-current portion of borrowings is long-term.
Forgetting to add back non-cash charges such as provision for doubtful debts created during the year.
Recording proposed dividend as an application in the same period it is created, when ICAN expects the paid dividend to be the application and the provision simply added back to net profit.
Mixing the T-account method with the statement method in a single answer, producing double-counted figures.

Funds Flow vs Cash Flow

Basis	Funds Flow	Cash Flow
Underlying concept	Net working capital	Cash and cash equivalents
Accounting basis	Accrual	Cash
Standard	Traditional practice	IAS 7 (IFRS)
Non-cash items	Adjusted	Disclosed separately

Edge Cases

When preliminary expenses or fictitious assets are written off, they are added back to net profit because they do not consume working capital. A bonus issue of shares is neither a source nor an application because it merely capitalises reserves.

Exam Strategy

Spend the first 8–10 minutes preparing the Schedule of Changes in Working Capital.
Verify that Total Sources = Total Applications before writing the final answer.
Present answers in ICAN’s preferred statement format, not T-accounts, unless the question explicitly requires otherwise.

Practice prompts:

From two given balance sheets and an additional information note, prepare the Schedule of Changes in Working Capital and the Statement of Sources and Applications of Funds.
Given a profit and loss account, compute Funds from Operations after adjusting for depreciation, goodwill written off, and profit on sale of plant.

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Funds Flow Statement