Fund Flow & Cash Flow Statements

8/7/2019 Fund Flow & Cash Flow Statements

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Fund Flow & Cash Flow Statements


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Flow of FundsThere is a continuous movement of resources into thebusiness, within the business and out of the business

The funds flow takes place only when there is a movement inthe current assets or the current liabilities during theaccounting period

Funds flow is used to refer to changes in or movement of current assets and current liabilities

Example: If land is purchased out of a long-term loan, there isno flow of funds. But if financed by a short-term loan or cash,there is an outflow of funds as working capital is reduced


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W orking Capital Working Capital = Current Assets Current LiabilitiesA ll the assets held by the business with theobjective of conversion to cash during anoperating cycle of the business

Part of the assets is financed by short-termcredits or borrowing which are to be met orrepaid during the operating cycle these

are current liabilitiesFund implies amount of resources investedin current assets from sources of financeother than current liabilities


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Funds Flow Statement B ased on a fundamental equation:

Sources of Funds Application of Funds = Change in Working Capital

A statement that depicts the ways andreasons for movement in the funds of anentity for a given accounting periodIt is not mandatory under any lawT here is no prescribed format or rules thatgovern this statement


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Various Uses of Fund

Uses of fund

Dividends

Non-operating lossesRedemption of redeemable preference share capital

Repayment of debentures/bonds

Repayment of long term loans

Purchase of fixed assets

Purchase of long term investment

Increase in working capital


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W orking Capital: Possible Sources

W orking capital is required to finance thatportion of current assets, which are notfinanced by current liabilities

S ources of Working Capital

InternalGenerations

ExternalGenerations


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Sources of W

orking CapitalWorking Capital Sources

ExternalInternal

Operations Non-Current Asset Sale

SurplusWorking

Capital use

Further Raising of

Capital

Increasedlong-termBorrowing


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Changes in Financial PositionA n analysis of the fluctuations of currentassets and current liabilitiesT ells where increased working capital isinvested and if decreased, from where fundshave been releasedFunds Flow Statement

D escribes the sources from which funds

were received and also the uses to whichthese funds were appliedT races the flow of funds through theorganization


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Fund Flow StatementT he statement of funds flow is usually dividedinto the two logical divisions

Sources of funds or inflows net effect of

increasing the working capitalUses of funds or applications of funds neteffect of decreasing the working capital

Gives a summary of the impacts of managerial

decisions on the position of the businessReflects the policies of financing, investment,acquisition and retirement of fixed assets,distribution of profits and the success of operations


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Moving Further T here can be cases when a funds flowstatement alone may not be able to providedetailed information and hence not helpful to

the investorsFor example, there would only be amention that there is an increase inworking capital but no information as towhere the increase in working capital hasbeen utilizedA possible answer to this providing a

statement of cash flow instead of a funds flow statement


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Statement of Cash Flow Is an extension of the funds flow statementexplained earlierA statement that presents the flow of cash to

and from an organization due to varioustransactions in a given accounting periodHelps assesses the ability of an enterprise togenerate cash and to utilize the cashA lso helps to assess the liquidity and solvency

of the entity


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Cash Flow StatementIt provides information on changes during anaccounting period by cash and to classify cashflow under three activities:

Operating A ctivitiesT he profit adjusted for depreciation, gainsand/or losses on sale of non-currentassets, tax paid, and working capital

changesInvesting A ctivitiesPurchases of non-current assets andproceeds on the sale of non-current assets


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Cash Flow StatementFinancing A ctivities

Proceeds on the issue of equity/preferenceshares and loans/debentures and the

redemption of redeemable preferenceshares and loan/debentures

So, a cash flow statement is a consequence of the difference between profits and cash

It provides the user with a mechanism forproviding additional information on its businessactivities and a better assessment of thecurrent liquidity of a business than a funds flowstatement


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Preparing a Cash Flow Statement A ll the cash flow activities are required to besegregated under three activities viz.,operating, investing and financing

T he sum of these activities reflects the netincrease or decrease in the cash and cashequivalentsHere, by cash we mean both cash in handand bank demand deposits, similarly cashequivalents means all the short-terminvestments which can be readily convertedinto cash without decline in its value


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OperatingA

ctivitiesIt is the principle revenue generating activities of an entityTwo ways of calculating itDirect method

We independently analyze the changes that cashtransactions cause in each balance sheet non-cashaccount

Indirect method

The Profit and Loss Account is adjusted for the effects of transactions of non-cash and non-operating nature Also known as Reconciliation to Net Income


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Cash flows from operating activitiesCash receipts from customers $ 2 7 , 5 00

Cash paid to suppliers and employees ( 2 0,000)

Cash generated from operations (sum) 7 , 5 00

Interest paid ( 2 ,000)Income taxes paid ( 2 ,000)

Net cash flows from operating activities $ 3 , 5 00

Cash flows from investing activities

Proceeds from the sale of equipment 7 , 5 00D ividends received 3 ,000

Net cash flows from investing activities 10, 5 00

Cash flows from financing activitiesD ividends paid (1 2 ,000)

Net cash flows used in financing activities (1 2 ,000)

.

Net increase in cash and cash equivalents 2 ,000

Cash and cash equivalents, beginning of year 1,000

Cash and cash equivalents, end of year $ 3 ,000


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T he indirect method uses net-income as a startingpoint, makes adjustments for all transactions fornon-cash items, then adjusts for all cash-based

transactions. A n increase in an asset account issubtracted from net income, and an increase in aliability account is added back to net income. T hismethod converts accrual-basis net income (loss) intocash flow by using a series of additions anddeductions


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T he following rules are used to make adjustments forchanges in current assets and liabilities, operating items

not providing or using cash and non-operating items.

D ecrease in noncash current assets are added to net incomeIncrease in noncash current asset are subtracted from netincomeIncrease in current liabilities are added to net incomeD ecrease in current liabilities are subtracted from net incomeExpenses with no cash outflows are added back to netincomeRevenues with no cash inflows are subtracted from net

income (depreciation expense is the only operating item thathas no effect on cash flows in the period)Non-operating losses are added back to net incomeNon-operating gains are subtracted from net income


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Citigroup Cash Flow S tatement(all numbers in thousands)

Period ending 12/31/2006N et income 21,538,000Operating activities, cash flows provided by or used in:D epreciation and amortization 2 , 79 0,000A djustments to net income 4 , 6 1 7 ,000D ecrease (increase) in accounts receivable 1 2 , 5 0 3 ,000

Increase (decrease) in liabilities ( A /P, taxes payable) 1 3 1, 6 22 ,000

D ecrease (increase) in inventories --

Increase (decrease) in other operating activities (1 7 3 ,0 5 7 ,000)

N et cash flow from operating activities 1 3 ,000Investing activities, cash flows provided by or used in:Capital expenditures ( 4 ,0 35 ,000)Investments ( 2 01, 777 ,000)Other cash flows from investing activities 1, 6 0 6 ,000

N et cash flows from investing activities ( 2 0 4 , 2 0 6 ,000)

Financing activities, cash flows provided by or used in:D ividends paid ( 9 , 8 2 6 ,000)Sale (repurchase) of stock ( 5 , 32 7 ,000)Increase (decrease) in debt 101,1 22 ,000Other cash flows from financing activities 1 2 0, 4 6 1,000

N et cash flows from financing activities 2 0 6 , 43 0,000

Effect of exchange rate changes 6 45 ,000

N et increase (decrease) in cash and cash equivalents $ 2 , 88 2 ,000


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Cash Flow vs. Funds Flow StatementBasic difference is that cash flow tracks cash position for a given period while funds flow tracks the workingcapital position

In a cash flow statement, the difference between thesources and applications of cash represent the closingcash balance. The difference in sources andapplications of funds, in funds flow statement represents

the change in the working capitalCash Flow statement takes items on cash basis while infunds flow statement the basis is accrual system of accounting.

Fund Flow & Cash Flow Statements

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