Fund Flow Statement - Preparation and Analysis: formula sheet

Key formulas

Working capital (meaning of funds)

Working capital = Current assets − Current liabilities

The default meaning of funds in a fund flow statement.

Change in working capital

Increase in working capital = Closing WC − Opening WC

Shown as the balancing figure between total sources and total applications.

Statement identity

Total sources − Total applications = Net increase (or decrease) in working capital

Use this to check your statement.

Fund transaction test

A transaction is a fund transaction only if it changes working capital

Changes within current assets and current liabilities only, or only between non-current items, do not change working capital.

Typical sources

Funds from operations, issue of shares or debentures, long-term borrowings, sale of fixed assets or investments

Each is a flow of funds into the business.

Typical applications

Purchase of fixed assets or investments, redemption of shares or debentures, repayment of loans, dividend and tax paid

Each is a flow of funds out of the business.

Funds from operations (from profit before tax, indirect)

FFO = Net profit + Non-fund/non-operating losses and charges − Non-operating gains

Add back depreciation, amortisation, goodwill and preliminary expenses written off, and loss on sale of assets. Add back transfers to reserves only if they were deducted in arriving at the profit used, and interest only if the question treats it as non-operating or financing. Deduct profit on sale of assets and non-operating income such as dividend received.

Funds from operations (from sales, direct)

FFO = Sales − Cash-type operating costs (excluding depreciation and other non-fund items)

Use this when a trading and profit and loss account is given in detail. Working capital items are ignored.

Funds from operations from closing P&L balance

Adjusted profit = Closing P&L balance − Opening P&L balance + Appropriations made (dividend, transfers to reserves)

Use when only balance sheets are given. Then add back non-fund items to get FFO.

Sale of a fixed asset

Sale proceeds = Book value + Profit on sale (or − Loss on sale)

Proceeds are a source. Profit or loss is only a bookkeeping adjustment in FFO.

Source versus application test

Non-current liability or capital increases = source; non-current asset decreases = source; reverse = application

Applies to share capital, debentures, loans, fixed assets and investments.

Working capital

Working capital = Current assets − Current liabilities

Calculate it for both years. Use only items classified as current.

Change in working capital

Change = Working capital (current year) − Working capital (previous year)

A positive result is an increase. A negative result is a decrease.

Effect of a current asset

Increase in current asset → increases working capital; decrease in current asset → decreases working capital

Applies to stock, debtors, cash, bank, bills receivable, prepaid expenses and similar items.

Effect of a current liability

Increase in current liability → decreases working capital; decrease in current liability → increases working capital

Applies to creditors, bills payable, outstanding expenses, and other current liabilities.

Check total

Total increases in working capital − Total decreases in working capital = Net change in working capital

This must match the difference in the two years' working capital.

Funds (working capital)

Working capital = Current assets − Current liabilities

Funds mean net working capital in this statement. Prepare a statement of changes in working capital from the two balance sheets.

Funds from operations

Funds from operations = Net profit before tax and appropriations + Non-fund and non-operating losses (depreciation, loss on sale, goodwill written off) − Non-operating gains (profit on sale of assets)

Usually found as the balancing figure of the adjusted profit and loss account.

Adjusted profit and loss account

Debit: appropriations, tax provision, depreciation, losses, closing balance. Credit: opening balance, gains, funds from operations (balancing figure)

Use this layout when the tax provision and proposed dividend are treated as non-current.

Fixed asset account

Opening balance + Purchases = Sale (book value) + Depreciation + Closing balance

For an asset shown net. Purchases is the unknown, so find it as the balancing figure.

Provision for depreciation account

Opening provision + Depreciation charged = Provision on assets sold + Closing provision

Use it with the asset at cost account. The depreciation charged is the balancing figure.

Provision for tax account

Opening provision + Tax charged to P&L = Tax paid + Closing provision

Tax paid is the balancing figure and is an application of funds.

Result of the statement

Total sources − Total applications = Increase or decrease in working capital

It must equal the change shown by the statement of changes in working capital. If not, recheck.

Funds from operations

Funds from operations = Net profit + non-fund and non-operating losses (depreciation, goodwill written off, loss on sale of assets) − non-operating gains (profit on sale of assets)

This is the main internal source. Adjust only items that do not affect working capital.

Change in working capital

Increase or decrease in working capital = Total sources of funds − Total applications of funds

This must agree with the schedule of changes in working capital. If not, recheck.

Working capital

Working capital = Current assets − Current liabilities

Increase in current assets or decrease in current liabilities raises working capital.

Fund flow vs cash flow

Fund flow: basis is working capital. Cash flow: basis is cash and cash equivalents.

A change in debtors or creditors affects working capital but is shown in the cash flow only through its cash effect.

Quick revision

• Funds usually means working capital: current assets minus current liabilities.
• A change between two current items does not affect working capital.
• Sources: funds from operations, issue of shares or debentures, long-term borrowing, sale of non-current assets.
• Applications: purchase of non-current assets, redemption of shares or debentures, repayment of loans, dividend paid, tax paid.
• Add back depreciation, amortisation and other non-cash charges to profit when finding funds from operations.
• Deduct non-operating gains, such as profit on sale of an asset, from net profit and show the sale proceeds as a separate source.
• Add back non-operating losses such as loss on sale of an asset to net profit, and show the actual sale proceeds separately as a source.
• Statement of changes in working capital: an increase in a current asset raises working capital, and an increase in a current liability lowers it.
• Sources minus applications must equal the net change in working capital.
• Under the non-current (traditional) approach, treat proposed dividend and provision for tax as non-current liabilities: add them back to profit when finding funds from operations and show their payment as an application. Under the current-liability approach, keep them as current liabilities in the working capital changes. State your assumption.
• Interpretation: if total sources exceed total applications, working capital has increased by the difference; check whether long-term sources funded long-term uses.
• Always show working notes, since step marks depend on them.

Common mistakes

• Treating fund flow statement and cash flow statement as the same thing. Fix: Remember that the fund flow statement normally uses working capital as funds, while the cash flow statement uses cash and cash equivalents. State the meaning you are using.
• Showing credit purchase of goods or payment of a creditor as a fund movement. Fix: Both sides are current items, so working capital is unchanged. Leave them out.
• Showing depreciation as an application of funds Fix: Depreciation is a non-fund charge. Add it back in FFO. It never appears as an application.
• Showing loss on sale of an asset as an application, or profit on sale as a source Fix: Show only the sale proceeds as a source. Add back the loss, or deduct the profit, in the FFO calculation.
• Putting an increase in current liabilities in the Increase column. Fix: Remember that more liabilities mean less working capital. Put it in the Decrease column.
• Including non-current items such as fixed assets, investments or long-term loans. Fix: Take only current assets and current liabilities. Everything else goes to the fund flow statement.
• Showing depreciation as a source of funds on its own, or not adding it back at all. Fix: Depreciation is only added back inside funds from operations. Never show it as a separate source, and never skip adding it back.
• Treating the closing provision for tax or proposed dividend as the amount paid. Fix: Use the provision account. Tax paid = opening provision + charge − closing provision. For dividend, the amount paid during the year is normally the opening proposed dividend.
• Only preparing the statement and giving no comment. Fix: When the question says analyse or interpret, always write a short conclusion on position, financing and utilisation.
• Saying fund flow and cash flow are the same. Fix: State the basis: working capital for fund flow, cash for cash flow. Add that cash flow has AS 3 / Ind AS 7 and three activity heads.

Exam tips

• Always write the meaning of funds you are assuming at the start. Examiners give marks for this clarity.
• For limitation and objective questions, write short numbered points of one line each rather than a long paragraph.
• In MCQs on transactions, apply the current versus non-current test; options that sound like money movement are often traps.
• For 'difference between' questions, give at least four points on both sides using matching bullets.
• Link your answer to the next step by noting that this concept is applied in preparing the actual statement from two balance sheets.
• Write a working note for funds from operations. Step marks are given for each adjustment even if the final figure is wrong.
• Always show the plant and accumulated depreciation accounts as working notes; purchases and sale proceeds come from there.
• State your assumption on tax and proposed dividend in one line. Examiners accept a stated, consistent treatment.