FFS AND CFS

8/6/2019 FFS AND CFS

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Flow of Funds Statement Flow of Funds Statement Flow of Funds Statement Flow of Funds Statement

Has been replaced by theHas been replaced by the cash flow statement cash flow statement (1989) in U.S. audited annual reports.(1989) in U.S. audited annual reports.

Has been replaced by theHas been replaced by the cash flow statement cash flow statement (1989) in U.S. audited annual reports.(1989) in U.S. audited annual reports.

A summary of a firms changes infinancial position from one period to

another; it is also called a sources and uses of funds statement or a statement

of changes in financial position .

A summary of a firms changes infinancial position from one period to

another; it is also called a sources and uses of funds statement or a statement

of changes in financial position .


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Flow of Funds Statement Flow of Funds Statement Flow of Funds Statement Flow of Funds Statement

All of the firm s All of the firm s investments and claimsinvestments and claimsagainst those investments.against those investments.

ExtendsExtends beyond just beyond just transactions involvingtransactions involvingcashcash ..

All of the firm s All of the firm s investments and claimsinvestments and claimsagainst those investments.against those investments.

ExtendsExtends beyond just beyond just transactions involvingtransactions involvingcashcash ..

What are What are fundsfunds ??


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The term Fund refers to all financial resources of the company. Fund has also been understood as Cash" only.

The most acceptable meaning of Fund is Working Capital

FlowFlow of of fundsfunds:: thethe termterm flowflow meansmeans changechange andand thereforetherefore thethe termtermflowflow of of fundsfunds meansmeans changes changes inin fundsfunds oror changes changes inin workingworkingcapitalcapital .. InIn otherother words,words, anyany increaseincrease oror decreasedecrease inin workingworking capitalcapitalmeansmeans flow flow of of fundsfunds ..

Concept of Flow

The Flow of funds refers to transfer of economic values from one

asset equity to another.


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FUNDS FLOW STATEMENT

Funds flow statements is dealt by Accounting Standard 7 .

.Meaning :- It explains changes in funds or changes in working capital. It explains the working capital position of the company which givesan idea to the top management about the liquidity position of thecompany.

Working capital :- It is the difference between current assets andcurrent liabilities.

Steps in preparation of funds flow statement:-

1. P reparation of working capital statement that explains increase or decrease in working capital.

2. preparation of funds from operation statement in which we findout operating profit.

3. P reparation of funds flow statement that shows various sourcesand application of fund .


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C urrent assetsCash in hand and bankMarketable investments Accounts receivables

StockPrepaid exp.

Fixed assetsGoodwill

Land and buildingPlant and machinery

Long term investment

C urrent liabilitiesBank overdraft

Outstanding expenses Accounts payable

Fixed liabilitiesShare capital

Reserve and surplusDebentures

Long term loans

Flow in fund Not flow in funds


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USES OF F UNDS FLOWUSES OF F UNDS FLOWWhyWhy thethe liquidliquid positionposition of of thethe businessbusiness becomingbecoming moremoreandand moremore unbalancedunbalanced inin spitespite of of companycompany isis makingmakingmoremore andand moremore profitsprofits..WhereWhere havehave thethe profit profit gonegone

What What willwill bebe thethe sourcessources forfor dividenddividend if if companycompany isis not not earningearning sufficient sufficient profit profit What What areare thethe sourcessources of of repayment repayment of of thethe loanloan takentakenHowHow muchmuch fundsfunds generationgeneration throughthrough normalnormal businessbusinessoperationoperation. .In what way the management has utilized the funds inIn what way the management has utilized the funds inthe past and what are going to be likely uses of fundsthe past and what are going to be likely uses of funds??


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SourcesSources

andand Application of Funds Application of Funds


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Funds from operationsFunds from operationsIssue of share capitalIssue of share capitalRaising of long term loansRaising of long term loans

Receipt from partly paid shares, called upReceipt from partly paid shares, called upSales of non current (fixed) assetsSales of non current (fixed) assetsNonNon--trading receipts, such as dividends receivedtrading receipts, such as dividends receivedSales of investment (long term)Sales of investment (long term)Decrease in working capital (as per schedule of Decrease in working capital (as per schedule of changes in working capital)changes in working capital)

S ources of FundsS ources of Funds


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Application or U ses of funds Application or U ses of fundsFunds lost in operationsFunds lost in operationsRedemption of preference share capitalRedemption of preference share capitalRedemption of debenturesRedemption of debentures

Repayment of longRepayment of long- -term loansterm loansPurchase of non current (fixed) assetsPurchase of non current (fixed) assetsPurchase of investments (long term)Purchase of investments (long term)NonNon--trading paymentstrading payments

Payments of dividendsPayments of dividendsPayments of taxPayments of taxIncrease in working capital (as per schedule of Increase in working capital (as per schedule of changes in working capital)changes in working capital)


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Funds flow AnalysisFunds flow AnalysisThis statement is based on the working Capital concept This statement is based on the working Capital concept of funds.of funds.

It measures the inflows and outflows of working capitalIt measures the inflows and outflows of working capitalresulting from different transactions.resulting from different transactions.

Funds flow statement measures and presents in anFunds flow statement measures and presents in ananalytical manner the summarized version of theanalytical manner the summarized version of thenumerous flows of funds for a specific period.numerous flows of funds for a specific period.

Funds Flow is the change in Working Capital Funds Flow is the change in Working Capital


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Changes in Working Capital positionChanges in Working Capital position

Increase in current assets and decrease inIncrease in current assets and decrease incurrent liabilitiescurrent liabilities

The acquisition of current assets and repayment of The acquisition of current assets and repayment of current liabilities will result in funds outflow. Thecurrent liabilities will result in funds outflow. Thefunds may be applied to finance an increase infunds may be applied to finance an increase instock, debtors etc. or to reduce trade creditors,stock, debtors etc. or to reduce trade creditors,

bank overdraft, bills payable etc.bank overdraft, bills payable etc.


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Decrease in current assets and increase inDecrease in current assets and increase incurrent liabilitiescurrent liabilities

The reduction in current assets e.g., stock or debtorsThe reduction in current assets e.g., stock or debtorsbalances will result in release of funds to be appliedbalances will result in release of funds to be appliedelsewhere. Short elsewhere. Short- -term funds raised during theterm funds raised during theperiod by any increase in the current liabilities likeperiod by any increase in the current liabilities liketrade creditors, bank overdraft and tax dues, meanstrade creditors, bank overdraft and tax dues, meansthat these sources have lent more at the end of thethat these sources have lent more at the end of the

year than at the beginning.year than at the beginning.


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D rawbacks of funds flow analysisD rawbacks of funds flow analysis

Historical natureHistorical natureStructural changes are not disclosedStructural changes are not disclosedNew items are not disclosedNew items are not disclosedNot relevant Not relevant Not foolproof Not foolproof


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Cash Flow AnalysisCash Flow AnalysisCash flow includes cash inflows and outflowsCash flow includes cash inflows and outflows cash receipts and cash payments during acash receipts and cash payments during aperiod.period.

A cash flow statement is a statement which A cash flow statement is a statement whichportrays the changes in cash position betweenportrays the changes in cash position betweentwo accounting periods.two accounting periods.

It helps in taking short term financial decisionsIt helps in taking short term financial decisionsand also in the preparation of cash budget forand also in the preparation of cash budget forthe next year.the next year.


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Statement of Cash FlowsStatement of Cash FlowsStatement of Cash FlowsStatement of Cash Flows

operating activitiesoperating activities ,,investing activitiesinvesting activities , and, and

financing activitiesfinancing activities ..

operating activitiesoperating activities ,,investing activitiesinvesting activities , and, and

financing activitiesfinancing activities ..

This statement reports cashThis statement reports cash inflowsinflows andandoutflowsoutflows based on the firm sbased on the firm s

A summary of a firms paymentsduring a period of time.


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Statement of Cash FlowsStatement of Cash FlowsCash Flow from Operating ActivitiesCash Flow from Operating Activities

Shows impact of transactions not defined asShows impact of transactions not defined asinvesting or financing activities.investing or financing activities.

These cash flows are generally the cash effects of These cash flows are generally the cash effects of transactions that enter into the determination of transactions that enter into the determination of net income.net income.


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Cash Flow From OperatingCash Flow From Operating

Activities ActivitiesCash InflowsCash Inflows

From sales of goods or servicesFrom sales of goods or servicesFrom interest and dividend incomeFrom interest and dividend income

Cash OutflowsCash OutflowsTo pay suppliers for inventoryTo pay suppliers for inventoryTo pay employees for servicesTo pay employees for services

To pay lenders (interest)To pay lenders (interest)To pay government for taxesTo pay government for taxesTo pay other suppliers for other operating expensesTo pay other suppliers for other operating expenses


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Statement of Cash FlowsStatement of Cash FlowsStatement of Cash FlowsStatement of Cash Flows

Cash Flow from Financing ActivitiesCash Flow from Financing ActivitiesShows impact of all cash transactions with shareholdersShows impact of all cash transactions with shareholders

and the borrowing and repaying transactions withand the borrowing and repaying transactions withlenders.lenders.

Cash Flow from Financing ActivitiesCash Flow from Financing ActivitiesShows impact of all cash transactions with shareholdersShows impact of all cash transactions with shareholders

and the borrowing and repaying transactions withand the borrowing and repaying transactions withlenders.lenders.

Cash Flow from Investing ActivitiesCash Flow from Investing ActivitiesShows impact of buying and selling fixed assets andShows impact of buying and selling fixed assets and

debt or equity securities of other entities.debt or equity securities of other entities.


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Cash Flow From InvestingCash Flow From Investing

Activities ActivitiesCash InflowsCash InflowsFrom sale of fixed assets (property, plant, equipment)From sale of fixed assets (property, plant, equipment)

From sale of debt or equity securities (other than common equity) of From sale of debt or equity securities (other than common equity) of

other entitiesother entities

Cash OutflowsCash OutflowsTo acquire fixed assets (property, plant, equipment)To acquire fixed assets (property, plant, equipment)

To purchase debt or equity securities (other than common equity)To purchase debt or equity securities (other than common equity)of other entitiesof other entities


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Cash Flow From FinancingCash Flow From Financing

Activities ActivitiesCash InflowsCash Inflows

From borrowingFrom borrowingFrom the sale of the firm s own equity securitiesFrom the sale of the firm s own equity securities

Cash OutflowsCash OutflowsTo repay amounts borrowedTo repay amounts borrowedTo repurchase the firm s own equity securitiesTo repurchase the firm s own equity securities

To pay shareholders dividendsTo pay shareholders dividends


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Cash flows from certain special itemsCash flows from certain special items

Cash flow from extraordinary items viz. badCash flow from extraordinary items viz. baddebts recovered, claims from insurancedebts recovered, claims from insurance

companies, winning of a law suit or lotterycompanies, winning of a law suit or lotteryetc.etc.


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Reporting of cash flowsReporting of cash flowsfrom operating activitiesfrom operating activities

Calculation of net increase or decrease in cash andCalculation of net increase or decrease in cash andcash equivalent accountscash equivalent accountsCalculation of net cash provided by or used byCalculation of net cash provided by or used by

operating activitiesoperating activitiesCalculation of net cash provided or used byCalculation of net cash provided or used byinvesting and financing activitiesinvesting and financing activitiesPreparation of cash flow statement Preparation of cash flow statement

Ensuring that the aggregate of net cash flow fromEnsuring that the aggregate of net cash flow fromall the three activities is equal to net increase orall the three activities is equal to net increase ordecrease in cash and cash equivalentsdecrease in cash and cash equivalents


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Reporting of cash flows fromReporting of cash flows from

operating activitiesoperating activities

In order to calculate the net cash flows in operatingIn order to calculate the net cash flows in operatingactivities, it is necessary to replace revenues andactivities, it is necessary to replace revenues andexpenses with actual receipts and payments inexpenses with actual receipts and payments in

cash. This is done by eliminating the noncash. This is done by eliminating the non- -cashcashrevenues and expenses from the earned revenuesrevenues and expenses from the earned revenuesand incurred expenses.and incurred expenses.

Two methods for conversion of net profit into net cashTwo methods for conversion of net profit into net cashflowsflows

1)1) Direct methodDirect method2)2) Indirect methodIndirect method


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Direct Method (Direct Method ( income statementincome statement

method)method) Also called the Reports cash receipts and Also called the Reports cash receipts andcash disbursements from operating activities.cash disbursements from operating activities.The difference between these two amountsThe difference between these two amounts

in the net cash flow from operating activates.in the net cash flow from operating activates.In other words, the direct method deductsIn other words, the direct method deducts

from operating cash receipts the operatingfrom operating cash receipts the operatingcash disbursements.cash disbursements.

The direct method results in the presentationThe direct method results in the presentationof a condensed cash receipts and cashof a condensed cash receipts and cashdisbursements statement.disbursements statement.


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Indirect MethodIndirect Method ( reconciliation method)( reconciliation method)

starts with net income and converts it to net starts with net income and converts it to net cash flow from operating activities.cash flow from operating activities.

In other words,In other words, the Indirect method adjusts net the Indirect method adjusts net income for items that affected reported net income for items that affected reported net income but didn't affected cashincome but didn't affected cash. .

To compute net cash flows from operatingTo compute net cash flows from operating

activities, noncash changes in the incomeactivities, noncash changes in the incomestatement are added back to net income, andstatement are added back to net income, andnet cash credits are deducted.net cash credits are deducted.

FFS AND CFS

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