Fund Flow Statement Method and Objective

Fund flow statement is a method by which we study changes in the financial position of a business enterprise between beginning and ending financial statements dates. Hence, the fund flow statement is prepared by comparing two balance sheet and with the help of such other information derived from the accounts as may be needed. Broadly speaking, the preparation of a fund flow statement consists of two parts:

1. Statement or schedule of changes in working capital.
2. Statement of Sources and Application of funds.

Statement or schedule of changes in working capital.

Working capital means the excess of current assets over current liabilities. Statement of changes in

working capital is prepared to show the changes in the working capital between two balance sheet dates. This statement is prepared with the help of current assets and current liabilities derived from the two balance sheets. The changes in the amount of any current asset or current liability in the current balance sheet as compared to that of the previous balance sheet either results in increase or decrease in working capital. The difference is recorded for each individual current asset and current liability. In case a current asset in the current period is more than in the previous period, the effect is and increase in working capital and it is recorded in the increase column. But if a current liability in the current period is more than in the previous period, the effect is decrease in working capital and it is recorded in the decrease column or vice versa. The total increase and the total decrease are compared and the difference shows the net increase or net decrease in working capital.

 WORKING CAPITAL = CURRENT ASSETS – CURRENT LIABILITIES

·        An increase in current assets increases working capital

·        A decrease in current assets decreases working capital

·        An increase in current liabilities decreases working capital

·        A decrease in current liabilities increases working capital

Statement of Sources and Application of funds

Fund flow statement is a statement which indicates various sources from which funds have been obtained during a certain period and the uses or applications to which these funds have been put during that period.