Fund Flow Analysis

Every cable concern, at the end of its financial period, prep ares Income Statements and respite Sheet. Income Statements show the net result, brighten Profit, of the business operations and contains various expenses incurred and losses and revenue earned during that period. Balance Sheet gives a summary of assets and liabilities as on a circumstance date and shows the financial position of the business. The liabilities side of a offset ragtime shows the sources from where funds are raised and the assets side shows how the funds raised are utilized.But it does non show the causes or reasons for qualifyings in assets and liabilities, come of funds, surrounded by two residue sheet dates. Therefore, a statement is prepared in addition to the Income Statements and Balance Sheet, to show changes in assets and liabilities between two balance sheet dates, which is known as Fund Flow Statement. It is a statement, in addition known as Statement of Changes in Financial Position, de signed to learn the changes in financial condition of a concern between to contract dates. The Term FundThe term Fund can be explained in many ways. In the narrow sense, it means change only. Transactions involving cash receipts and payments are considered in this approach. In the broader sense, fund means running(a) pileus, which is the excess of laming assets over on-going liabilities. For fund persist analysis, the broader approach, work capital approach, is considered. The word Flow means change and fund flow means change in funds or change in working capital. Any increase or change magnitude in working capital is flow of funds.Flow of funds may be all inflow of funds or passing water of funds. Inflow refers to sources of funds and outflow refers to applications of funds. If a doing brings any change in working capital, flow of funds takes place. This will happen when changes occurs in the values of primed(p) assets, appoint capital, long term debts etc. with th e corresponding changes in the values of reliable assets or current liabilities. Many works which take place in a business enterprise may increase or decrease its working capital or even may not necessitate any change in it.Following are some examples bargain for of fixed assets When an asset is purchased, cash is going out on that point by reducing the cash balance. The effect of this doing is that working capital decreases and this change (decrease) in working capital is called as application of funds. here(predicate) the accounts obscure are real Assets (Cash) and frosty Assets. Issue of share capital This transaction will increase the working capital as cash balance increases. This change (increase) in working capital is called as source of funds. Here the two accounts involved are current assets (Cash) and Shareholders monetary resource (Share bully).Sale of meliorate Assets The transaction will have the effect of increasing the working capital as the cash balance increases thereby increasing working capital. It is a source of funds. Here the accounts involved are current assets (Cash) and Fixed Assets. salvation of debentures This transaction has the effect of reducing the working capital, as it results in step-down in cash balance. It is an application of funds. The two accounts affected by this transaction are Current Assets (Cash) and Long-Term Liability (Debenture).Purchase of inventory This transaction results in decrease in cash and increase in roue thereby keeping the total current assets at the same figure. accordingly there will be no change in the on the job(p) Capital. In this case both the accounts involved are Current Assets (Cash and Stock). judge Bills Payable issued by creditors The effect of this transaction on Working Capital is Nil as it results in increase in bills payable (a current liability) and decreases the creditors (another current liability). Since there is no change in total current liabilities there is no flow of funds. The accounts involved as current liabilities.Fixed Assets purchased and payment is made by issuing shares This transaction will not have any impact on working capital as it does not result in any change either in the current asset or in the current liability. Hence there is no flow of funds. The two accounts affected are Fixed Assets and Shareholders Funds (Capital a/c). From the above examples, it is clear that there will be flow of funds when the transaction involves a) Current assets and fixed assets b) Current assets and capital c) Current assets and long term liabilities d) Current liabilities and long term liabilities e) Current liabilities and fixed assets.