How to prepare Fund Flow statement

Before preparing of fund flow statement, you must know different accounting terms in fund flow statement.

Academic need to learn the fund flow statement

1. AS – 3 units 1.
Accounting standard 3 units 1 of Institute of Chartered Accountant of India explains preparation and presentation of statement of changes in financial position or fund flow statement

2. UGC – NET – Commerce

If you want to clear UGC –NET in commerce subject, you should also learn fund flow statement. Because it includes in paper 11 and paper 3 A syllabus in the form of fund flow analysis.

3. Graduate / Post Graduate Classes

Fund flow statement is full subject in B.Com. , B.B.A., B.C.A. and M.Com. , M.B.A., M.C.A. and C.A.  classes . For succeeding in these classes, you should know the whole system of fund flow statement.

4. Helpful in Practical business environment

Fund flow statement is very helpful for solving following practical problems of business
Why are current assets are decreasing, even there are high profit?
  1. Why did Company not issue dividend, even company has obtained profit?
  2. What happened with net profit, where did it go?
  3. What did Company do with the fund received from selling of shares and debentures?
What are main sources of company to repay his debts?

So, above questions’ answer can be given after making fund flow statements.

Definition of Fund

Fund means working capital. If current assets of company is more than current liability of business, it is called working capital and working capital’s other name is Fund.

Fund = Working capital = Current assets – Current liability

Definition of Flow of Fund

Flow of fund means movement of fund. I take the example of air; we can feel its movement or flow of air. Same thing is happen with fund, due to the activity of business fund is transfer from one asset to another assets. If fixed assets are converted into current asset or fixed liability is converted into current liabilities, these are the flow of fund. But if current assets are changed with current assets or current assets are changed into current liabilities, then, there is no flow of fund because there is no change working capital. Suppose, we get the money from debtor, this is not flow of fund because, working capital is not changed. Both items of current assets and when current assets change into current assets, there will not be change in working capital.

Flow of Fund = Fixed asset changes into current asset or current asset changes into fixed assets


Fixed liability changes into current liability or current liability changes into fixed liability.

Definition of fund flow statement

Fund flow statement is a statement which shows the inflow and out flow of funds between two dates of balance sheet. So, it is known as the statement of changes in financial position. We all know that balance sheet shows our financial position and inflow and outflow of fund affects it. So, in company level business, it is very necessary to prepare fund flow statement to know what the sources are and what are applications of fund between two dates of balance sheet. Generally, it is prepare after getting two year balance sheet.

According to Prof. Anthony, “The funds flow statement describes the sources from which additional funds were derived and the use of which these funds were put.”

Fund flow statements are known with different names

Statement of source and uses of funds

Or summary of financial operations

Movement of working capital statement


Fund received and distributed statement


Fund generated and expended statement.

Steps for making Fund flow statement

First Step

Making of statement of Changes of Working Capital

For making of fund flow statement. It is very necessary to make statement of changes of working capital. Because net increase in working capital is use of fund and net decrease in working capital is source of fund. So, it is duty of accountant to make statement of changes of working capital. Making of statement of changes working capital is very easy and simple.

We take two balance sheets, one is current year balance sheet and other is previous year balance sheet. Then we separate current assets and current liabilities.

If current assets are more than previous year current assets, it means increase in working capital.
If current assets are less than previous year current assets, it means decrease in working capital. Because, relationship between current assets and working capital is positive and if any changes in current assets, working capital will change in same direction.
If current liabilities are more than previous year current liabilities, it means decrease in working capital.
If current liabilities are less than previous year current liabilities, it means increase in working capital. Relationship between working capital and current liabilities are inverse.

Statement or schedule of changes in working capital

Particular--------------- ↓ previous year ↓ Current year ↓ Effect on working capital
-----------------------------------------------------------↓ Increase ↓ Decrease
Current Assets

Þ Cash in hand
Þ Bills receivable
Þ Sundry debtors
Þ Temporary investments
Þ Stocks / inventories
Þ Prepaid expenses
Þ Accrued incomes
Total current assets----------- ↓xxxx ↓ xxxxx↓
----------------------------------------------------------------------- -----------------

Current liabilities

Þ Bills payables
Þ Sundry creditors
Þ Bank overdraft
Þ Short term advances
Þ Dividends payables
Þ Provision for taxation
Total current Liabilities ----------↓xxxx ↓xxxx ↓
------------------------------------------------------------------ -------------------
Working capital

Net increase or decrease in working capital =

Increase in working capital – Decrease in working capital

2nd Step

Statement showing the fund from operation

Because is the source of fund and will show in fund flow statement’s source side. So before making fund flow statement, we must make statement showing the fund from operation.

Operation means business activity and fund from operation means profit from business activity. So, you will easy understand that profit from business activity between two accounting period must be the source of fund.

Statement of fund from operations
------------------------------------------------------------------------>↓ Amount ↓

Closing balance of profit and loss account or retained earning as
Given in the Balance sheet

Add non –fund and non operating items which have been already
Debited to profit and loss account

1. depreciation
2. amortization of fictitious and intangible assets

Þ goodwill
Þ patents
Þ trade marks
Þ preliminary expenses
Þ discount on issue of shares

3. Appropriation of retained earning such as

Þ Transfer to general reserve
Þ Dividend equalization fund
Þ Transfer to sinking fund
Þ Contingency reserve etc.

4. Loss on sale of any non current or fixed assets such as

Þ Loss on sale of land and building
Þ Loss on sale of machinery
Þ Loss on sale of furniture
Þ Loss on sale of long term investments

5. Dividends including

Þ Interim dividend
Þ Proposed dividend

(If it is an appropriation of profit and not taken as current liability)
6. Provision for taxation (if it is not taken as current liability)
7. Any other non fund / non operating items which have been debited to P/L account


Total ( A)-------------------------------------------------------> ↓ XXXXX ↓
Less Non –Fund or non operating items which have already been credited to profit and loss account

1. Profit or gain from the sale of non current / fixed assets such as

Þ Profit on sale of land and building
Þ Profit on sale of plant and machinery
Þ Profit on sale of long term investment etc.

2. Appreciation in the value of fixed assets such as increase in the value of land if it has been credited to profit and loss account
3. Dividends received
4. excess provision retransferred to profit and loss account or written back .
5. any other non operating item which has been credited to profit and loss account
6. opening balance of profit and loss account or retained earnings as given in the balance sheet
Total ( B)--------------------------------------------------------------> ↓ XXXXX ↓
Funds received from operation or business activities = total ( A) – Total ( B)

You can make also above statement in t shape adjusted profit and loss account form .

3rd Step

Fund flow statement

-------------------------------------------------------------------> ↓ Amount ↓

A ) Source of funds
  1. fund from operation ( balance of second step )
  2. issue of shares capital
  3. issue of debentures
  4. raising of long term loans
  5. receipts from partly paid shares , called up
  6. amount received from sales of non current or fixed assets
  7. non trading receipts such as dividend received
  8. sale of investments ( Long term )
  9. decrease in working capital as per schedule of changes in working capital
    total -------------------------------------------------------------> ↓ XXXXX ↓
    Applications or uses of funds
    1. Funds lost in operations ( Balance negative in second step )
2. redemption of preference share capital
3. redemption of debentures
4. repayment of long term loans
5. purchase of long term loans
6. purchase of long term investments
7. non trading payments
8. payment of tax
9. payment of dividends
10. increase in working capital ( As per positive balance of ist step )
total --------------------------------------------------------> ↓ XXXXX



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Accounting Education: How to prepare Fund Flow statement
How to prepare Fund Flow statement
Accounting Education
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