CMA Intermediate · Financial Management and Business Data Analytics

Fund Flow Statement: Preparation and Analysis

A fund flow statement shows where a business got its funds from and where it used them between two balance sheet dates. You solve it by finding the change in working capital, computing funds from operations, listing long-term sources and applications, and checking that both sides balance.

What this chapter covers

A fund flow statement explains the change in financial position between two balance sheet dates. The balance sheet shows what a firm owns and owes on one day. It does not show how it moved from last year's position to this year's. This statement fills that gap. In most exam problems, "funds" means working capital, that is current assets minus current liabilities. So the statement tracks how funds were raised and how they were used, and the net result explains the change in working capital.

The chapter has a fixed logic. First you fix the meaning of funds. Then you classify every change into a source or an application. Next you prepare the statement of changes in working capital, which covers all current items. Then you prepare the full statement, which deals with non-current items and adjustments such as depreciation, provisions, dividends, tax, and sale or purchase of fixed assets. Finally you interpret the result.

This chapter builds on the same balance sheet and profit data you meet in financial statement analysis and working capital management. The interpretation part connects to financing decisions, such as whether long-term funds are financing long-term assets. It also relies on basic accounting from your financial and corporate accounting papers, so your accounting adjustments need to be sound. Check the current ICMAI syllabus to confirm where this topic sits in your course.

This chapter is numerical and rule-based, so the method can be learned and repeated. If a numerical question is set on it, that question may carry up to 14 marks. Step marks are usually given for working notes and correct steps, so show each adjustment, working note and total clearly. The same ideas may also be tested in short MCQs on the meaning of funds, sources and applications, and the effect of a transaction on working capital. Practise the layout so that you can set out the answer neatly and check it quickly.

Fund Flow Statement - Preparation and Analysis: topics in the order to study them

1Fund Flow Statement: Meaning and Concept of FundsStart here because every later step depends on what "funds" means, and the exam asks this in MCQs and short notes.
2Sources and Applications of FundsNext learn which transactions bring funds in and which take them out, since you need this to classify every balance sheet change.
3Statement of Changes in Working CapitalStudy this third because it is the first schedule you prepare in a problem and its total must match the final statement.
4Preparation of Fund Flow Statement with AdjustmentsTake this after the basics, as it combines classification, working notes and adjustments into the full exam answer.
5Analysis and Interpretation of Fund Flow StatementFinish with interpretation, because you can only comment on the statement once you can prepare it correctly.

How to prepare Fund Flow Statement - Preparation and Analysis

Treat this chapter as a method to repeat, not a theory to memorise. Build the method first, then add adjustments one by one.

Write the meaning of funds, source and application in your own words, and note which items do not affect funds, such as a transfer between two current items.
Practise classifying each balance sheet change. For non-current items, an increase in a non-current liability or in capital (through a cash issue) is a source. The sale proceeds of a non-current asset are a source. A decrease in a non-current asset caused by depreciation or write-off is a non-cash adjustment, not a source. A decrease in a non-current liability or capital, or the purchase of a non-current asset, is an application. Ignore non-fund transactions such as a bonus issue, since they do not bring in or take out funds.
Prepare the statement of changes in working capital on its own. Show each current asset and current liability for both years, then the increase or decrease in working capital.
Learn the funds from operations layout. Start with the profit, add back non-fund and non-operating charges, and deduct non-operating gains.
Solve problems with adjustments in one set: depreciation, sale of fixed assets, dividend, tax provision, and issue or redemption of shares and debentures. Write a working note for each.
Check that total sources minus total applications equals the change in working capital. If not, find the missing item before moving on.
Write two or three lines of interpretation for every solved problem, such as how long-term sources financed working capital or fixed assets.

Common mistakes in Fund Flow Statement - Preparation and Analysis

Adding depreciation as a source of funds.
Fix: Depreciation is only an adjustment to profit because it is a non-cash charge. Add it back in funds from operations and never list it as a separate source.
Showing profit or loss on sale of an asset inside funds from operations without adjusting for it.
Fix: Remove the gain, or add back the loss, in funds from operations. Then show the actual sale proceeds as a source of funds.
Putting current asset and current liability changes into the main statement.
Fix: Current items belong only in the statement of changes in working capital. The main statement shows non-current items and funds from operations.
Getting the direction wrong for increases and decreases in working capital.
Fix: In the working capital schedule, an increase in a current asset or a decrease in a current liability increases working capital. Verify that the net change equals the difference between sources and applications in the main statement.
Ignoring the adjustments given in notes, such as dividend, tax or fixed asset sales.
Fix: Read every note before you start. Tick each one off once it has a working note and has been placed in the statement.
Writing no interpretation or a vague one.
Fix: Write two or three specific lines tied to your figures, such as the main source of funds, the main use, and whether working capital improved.

Last-day revision: Fund Flow Statement - Preparation and Analysis

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.

Fund Flow Statement - Preparation and Analysis practice questions

Fund Flow Statement - Preparation and Analysis in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Fund Flow Statement - Preparation and Analysis: frequently asked questions

What does funds mean in a fund flow statement?

In most problems, funds means working capital, which is current assets minus current liabilities. Read the question to confirm this. A source of funds raises working capital and an application lowers it.

Is the statement of changes in working capital part of the fund flow statement?

It is a supporting schedule. It shows how each current asset and current liability changed. Its net result must agree with the difference between total sources and total applications in the main statement.

How do I calculate funds from operations?

Start with the net profit for the period. Add non-cash and non-operating charges such as depreciation and losses on sale of assets. Deduct non-operating gains. Follow the exact adjustments given in the question.

Can fund flow questions come in the MCQ section?

They may. Such MCQs would be short and could test points like what counts as a source, whether a transaction changes working capital, or what an item means. A longer numerical question, if set, would test the full preparation and interpretation.