Financial Management and Business Data Analytics · Fund Flow Statement - Preparation and Analysis

How to Prepare a Fund Flow Statement with Adjustments

Updated 10 October 2026 · Fact-checked

A fund flow statement shows where a firm's funds, meaning net working capital, came from and where they went between two balance sheet dates. To prepare it, find the change in working capital, build an adjusted profit and loss account for funds from operations, analyse fixed asset accounts, then list sources and applications and check they match.

Understand Preparation of Fund Flow Statement with Adjustments

A fund flow statement explains why net working capital changed between two balance sheet dates. Here, funds means net working capital = current assets − current liabilities. So any transaction that only moves items inside current assets and current liabilities is ignored. Only transactions that touch a non-current item matter.

A comparative balance sheet gives you the closing and opening figure of every item, but not the transactions behind them. The adjustments in the question fill that gap. Each adjustment helps you reconstruct one account: the profit and loss account, a fixed asset account, a provision for depreciation account, or a provision for tax account.

The adjusted profit and loss account gives funds from operations. You start from the closing and opening balance of the profit and loss account. Then you put in every appropriation (transfer to reserve, dividend) and every non-fund or non-operating item (depreciation, loss or profit on sale of assets, tax provision charged). The balancing figure is funds from operations.

Fixed assets need their own accounts. Reconstruct the asset account (or the asset and its provision for depreciation) to find purchases, sale proceeds and the depreciation charged. Purchases are an application of funds. Sale proceeds are a source.

Provision for tax and proposed dividend can be treated in two ways. If the question treats them as appropriations (the common textbook approach unless told otherwise), treat them as non-current: add back the current year's provision to profit, and show the amount actually paid as an application. If the question says to treat them as current liabilities, leave them in the working capital statement and do not add them back. Always follow the instruction in the question and state your assumption.

Key rules to remember

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.

How to solve Preparation of Fund Flow Statement with Adjustments questions

Use the same sequence for every question. It keeps the working neat and makes it easy for the examiner to award step marks.

1Read the adjustments first and note the treatment asked for tax and proposed dividend.
2Separate current items from non-current items. Prepare the statement of changes in working capital with the increase or decrease in each current asset and current liability, and the net change.
3Prepare the adjusted profit and loss account. Put in closing and opening balances, transfers to reserves, dividend, tax provision, depreciation and gains or losses. Find funds from operations as the balancing figure.
4Prepare the fixed asset account and the provision for depreciation account where needed. Find purchases, sale proceeds and depreciation.
5Prepare the provision for tax account (and the dividend payment) to find the cash amounts paid, if tax and dividend are treated as non-current.
6Compare the other non-current items: share capital, debentures, loans, investments. Any increase in a liability or decrease in an asset is a source. The reverse is an application.
7Draw up the fund flow statement with sources on one side and applications on the other. The difference is the change in working capital. Check it against Step 2 and show your workings as notes.

Quickest way: Account by account, then tick it off

When to use it: Use this under time pressure when the question gives a full comparative balance sheet and only a few adjustments.

Write the change in every balance sheet item in a column. Mark each as current or non-current.
Net the current items to get the change in working capital immediately. You will use it to check the final answer.
Take each non-current item in turn and ask: is the change a source or an application? Use the adjustments to explain the figure.
Run the profit and loss account last. It is the only item that needs a balancing figure, and it lets you check your work.
Finish by checking that sources minus applications equals the change in working capital. If it is out by the same amount as one item, you have probably missed that item.

Common mistakes in Preparation of Fund Flow Statement with Adjustments

Showing depreciation as a source of funds on its own, or not adding it back at all.
Students remember that depreciation is a non-cash item but forget how it enters the statement.
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.
The balance sheet figure looks like a payment.
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.
Not adding back the current year's tax provision and proposed dividend when treating them as non-current.
Students take the P&L balance change as the profit and forget it is after these items.
Fix: Use the adjusted P&L account. Debit it with tax, dividend and reserve transfers so funds from operations comes out before these items.
Using the difference in net fixed assets as purchases.
Students ignore depreciation and assets sold.
Fix: Rebuild the asset account with sale at book value and depreciation. Then find purchases as the balancing figure.
Putting the whole sale price as a source and the profit or loss as an extra item.
Mixing book value, sale price and profit on sale.
Fix: The source is the sale proceeds. The profit or loss on sale is only an adjustment inside funds from operations, subtracted if profit and added if loss.
Including changes in current assets and liabilities in the sources and applications.
Treating the statement like a cash flow statement.
Fix: Current items go only in the statement of changes in working capital. The fund flow statement shows only the non-current changes and funds from operations.

Worked examples

Example 1

The balance sheets of Kaveri Industries Ltd are given below. Additional information: (a) Plant with a book value of ₹30,000 was sold for ₹36,000. (b) Depreciation of ₹80,000 was charged on plant. (c) Provision for tax of ₹90,000 was made during the year. (d) Last year's proposed dividend was paid. (e) ₹50,000 was transferred to general reserve. Treat provision for tax and proposed dividend as non-current items. Prepare the fund flow statement.

Liabilities (31 March 2025 → 2026): Equity share capital ₹4,00,000 → ₹6,00,000; General reserve ₹1,00,000 → ₹1,50,000; Profit and loss account ₹80,000 → ₹1,20,000; Provision for tax ₹60,000 → ₹70,000; Proposed dividend ₹50,000 → ₹60,000; Long-term loan ₹2,00,000 → ₹1,50,000; Creditors ₹1,10,000 → ₹1,30,000.

Assets (31 March 2025 → 2026): Plant (net) ₹4,00,000 → ₹5,20,000; Land ₹2,00,000 → ₹2,00,000; Investments ₹1,00,000 → ₹1,50,000; Debtors ₹1,50,000 → ₹2,00,000; Stock ₹1,20,000 → ₹1,60,000; Cash ₹30,000 → ₹50,000.

Show the solution

Statement of changes in working capital: debtors increase ₹50,000, stock increase ₹40,000, cash increase ₹20,000. Total increase in current assets ₹1,10,000. Creditors increase ₹20,000. Net increase in working capital = ₹1,10,000 − ₹20,000 = ₹90,000.
Adjusted profit and loss account. Debit side: transfer to general reserve ₹50,000; proposed dividend ₹60,000; provision for tax ₹90,000; depreciation ₹80,000; closing balance ₹1,20,000. Total ₹4,00,000. Credit side: opening balance ₹80,000; profit on sale of plant ₹6,000 (₹36,000 − ₹30,000). Funds from operations (balancing figure) = ₹4,00,000 − ₹86,000 = ₹3,14,000.
Plant account: opening ₹4,00,000 + purchases = sale ₹30,000 + depreciation ₹80,000 + closing ₹5,20,000. Right side total = ₹6,30,000. Purchases = ₹6,30,000 − ₹4,00,000 = ₹2,30,000.
Tax paid: opening ₹60,000 + charge ₹90,000 − closing ₹70,000 = ₹80,000.
Dividend paid = last year's proposed dividend ₹50,000. The ₹60,000 now proposed is an appropriation, already deducted in Step 2.
Other non-current items: shares issued ₹2,00,000 (source). Loan repaid ₹50,000 (application). Investments purchased ₹50,000 (application). Land is unchanged.
Sources: funds from operations ₹3,14,000 + issue of shares ₹2,00,000 + sale of plant ₹36,000 = ₹5,50,000. Applications: purchase of plant ₹2,30,000 + repayment of loan ₹50,000 + purchase of investments ₹50,000 + tax paid ₹80,000 + dividend paid ₹50,000 = ₹4,60,000.
Net increase in working capital = ₹5,50,000 − ₹4,60,000 = ₹90,000. This matches Step 1.

Answer: Total sources ₹5,50,000; total applications ₹4,60,000; increase in working capital ₹90,000. Funds from operations is ₹3,14,000.

Example 2

Details from the books of Narmada Textiles Ltd for the year ended 31 March 2026: Machinery at cost ₹6,00,000 (opening) and ₹7,00,000 (closing). Provision for depreciation on machinery ₹2,00,000 (opening) and ₹2,30,000 (closing). During the year a machine costing ₹1,00,000 with accumulated depreciation of ₹60,000 was sold for ₹30,000. Profit and loss account balance ₹1,50,000 (opening) and ₹2,10,000 (closing). During the year ₹20,000 was transferred to general reserve, ₹40,000 was provided for proposed dividend and ₹70,000 was provided for tax. Treat tax and dividend as non-current. Find the funds from operations and the fixed asset flows.

Show the solution

Machinery at cost account: opening ₹6,00,000 + purchases = cost of machine sold ₹1,00,000 + closing ₹7,00,000. Purchases = ₹8,00,000 − ₹6,00,000 = ₹2,00,000 (application of funds).
Provision for depreciation account: opening ₹2,00,000 + depreciation charged = provision on machine sold ₹60,000 + closing ₹2,30,000. Depreciation charged = ₹2,90,000 − ₹2,00,000 = ₹90,000.
Loss on sale = book value − sale proceeds = (₹1,00,000 − ₹60,000) − ₹30,000 = ₹10,000.
Adjusted profit and loss account. Debit side: transfer to general reserve ₹20,000; proposed dividend ₹40,000; provision for tax ₹70,000; depreciation ₹90,000; loss on sale of machine ₹10,000; closing balance ₹2,10,000. Total ₹4,40,000. Credit side: opening balance ₹1,50,000 and funds from operations (balancing figure).
Funds from operations = ₹4,40,000 − ₹1,50,000 = ₹2,90,000.
Check: net profit after tax and before appropriations = ₹2,10,000 − ₹1,50,000 + ₹20,000 + ₹40,000 = ₹1,20,000. Profit before tax = ₹1,20,000 + ₹70,000 = ₹1,90,000. Add depreciation ₹90,000 and loss on sale ₹10,000 = ₹2,90,000. This agrees.

Answer: Funds from operations ₹2,90,000. Fixed asset flows: purchase of machinery ₹2,00,000 (application) and sale proceeds ₹30,000 (source). Depreciation charged for the year is ₹90,000.

Exam tips

Write the treatment of provision for tax and proposed dividend as a note at the start. If the question is silent, state your assumption clearly and apply it consistently.
Always show the adjusted profit and loss account, the asset accounts and the provision for tax account as working notes. Step marks are given for them even if the final figure is wrong.
Prepare the statement of changes in working capital first. It gives you a number to check your final statement against.
In MCQs, the usual trap is a single item: tax paid, depreciation or purchases. Rebuild that one account quickly and do not rely on the change in the balance sheet figure.
Watch for the words funds, net working capital, and non-current in the question. They tell you which treatment the examiner expects.

Practice questions from Fund Flow Statement - Preparation and Analysis

Preparation of Fund Flow Statement with Adjustments in other exams

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

Preparation of Fund Flow Statement with Adjustments: frequently asked questions

How do I find funds from operations from two balance sheets?

Prepare an adjusted profit and loss account. Put in the opening and closing balances, all appropriations, tax provision, depreciation and gains or losses on sale. The balancing figure is funds from operations.

How are provision for tax and proposed dividend treated in a fund flow statement?

If treated as non-current, add back the current year's provision to profit and show the tax and dividend actually paid as applications. If the question treats them as current liabilities, do not add them back; they appear in the statement of changes in working capital. Follow the instruction in the question.

How do I find the purchase of fixed assets?

Rebuild the fixed asset account. Opening balance plus purchases equals the book value of assets sold plus depreciation plus closing balance. If assets are shown at cost with a separate provision for depreciation, use both accounts.

Is depreciation a source of funds?

No. Depreciation is a non-fund charge that reduced profit, so you add it back when finding funds from operations. It does not bring in any funds by itself.