Preparation Of Funds Flow Statement
In order to prepare a Funds Flow Statement, it is necessary to find out the “sources” and “applications” of funds.
Sources of funds. The sources of funds can be both internal as well as external.
Internal Sources: Funds from operations is the internal source of funds. However, following adjustments will be required in the figure of Net Profit for finding out real funds from operations.
Add the following items as they do not result in outflow of funds:
- Depreciation on fixed assets
- Preliminary expenses or goodwill, etc., written off.
- Contribution of debenture redemption find, transfer to general reserve, etc, if they have been deducted before arriving at the figure of net profit.
- Provision for taxation and proposed dividend are usually taken as appropriations of profits only and not current liabilities for the purposes of Funds Flow Statement. This is being discussed in detail later. Tax or dividends actually paid are taken as applications of funds. Similarly, interim dividend paid is shown as an applications of funds. All these items will be added back to net profit, if already deducted, to find funds from operations.
- Loss on sale of fixed assets.
Deduct the following items as they do not increase funds;
- Profit on sale of fixed assets since the full sale proceeds are taken as a separate source of funds and inclusion here will result in duplications.
- Profit on revaluation of fixed assets.
- Non-operating incomes such as dividend received or accrued dividend, refund of income tax, rent received or accrued rent. These items increase funds but they are non-operating incomes. They will be shown under separate heads as ‘source of funds’ in the Funds Flow Statement.
In case the profit and Loss Account shows “Net Loss”, this should be taken as an item which decreases the funds.
External Sources: These sources includes-
- Funds from long-term loans
- Sale of fixed assets
- Funds from increase in share capital
- Application of funds
- Purchase of fixed assets
- Payment of dividends
- Payment of fixed liabilities.
- Payment of tax liability.
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