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

Sources and Applications of Funds in a Fund Flow Statement

Updated 10 October 2026 · Fact-checked

Sources of funds are items that increase long-term funds: funds from operations, share and debenture issues, long-term loans, and sale of non-current assets. Applications are uses of those funds: asset purchase, dividend paid, loan repayment and redemption. Compute funds from operations by adding back non-cash and non-operating charges and deducting non-operating gains.

Understand Sources and Applications of Funds

A fund flow statement shows where long-term funds came from during a year and where they went. In the usual exam approach, "funds" means working capital (current assets minus current liabilities). So the statement explains why working capital changed, using only non-current items and profit.

A source of funds is any transaction that brings in funds from outside the working capital pool. Examples are profit from business operations, issue of shares or debentures, raising a long-term loan and selling a fixed asset or investment.

An application of funds is a use of funds that takes them out of the working capital pool. Examples are buying fixed assets, paying dividend, repaying a long-term loan, redeeming debentures or preference shares, and paying tax.

The key idea: a transaction that moves between two current items (cash paid to a creditor, debtors collected) does not appear in the statement. It only changes the make-up of working capital. Only transactions that touch a non-current item, or profit, show up.

The hardest part is funds from operations. Net profit is struck after non-cash charges (depreciation, goodwill written off) and non-operating items such as loss on sale of an asset. You adjust profit to remove these and get the true operating inflow of funds.

Two items need care:

Transfers to reserves are appropriations, not charges against profit. Add them back only if they were deducted before arriving at the profit figure you are using. If the profit is before appropriations, no add-back is needed.
Interest (for example, on debentures) is added back only if the question treats it as non-operating or a financing item. Otherwise treat it as an operating charge and leave it alone.

Key rules to remember

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.

How to solve Sources and Applications of Funds questions

Use this order for any question on sources and applications of funds, where funds mean working capital.

1Decide the meaning of funds. Unless told otherwise, funds mean working capital.
2List the changes in every non-current account between the two balance sheets: share capital, reserves, debentures, loans, fixed assets, investments.
3Prepare the adjusted profit and loss account (and provision accounts if needed) to find funds from operations. Add back non-fund and non-operating charges; deduct non-operating gains.
4Prepare fixed asset and accumulated depreciation accounts to find purchases, sale proceeds and depreciation.
5Classify each non-current change: increase in liability or decrease in asset is a source; decrease in liability or increase in asset is an application.
6Treat dividend paid, tax paid (if tax is treated as an appropriation or a non-current item as the question states) and loan repayments as applications.
7Write the statement of sources and applications. Total sources minus total applications must equal the net change in working capital.
8Verify against the schedule of changes in working capital. If the figures differ, recheck the adjustments.

Quickest way: Non-current movement scan

When to use it: When balance sheets are given with a few notes and time is short.

Take every non-current line and write the difference (closing minus opening).
Tag liability and capital increases as S, decreases as A. For assets, tag decreases as S and increases as A.
Get funds from operations from the change in P&L balance plus appropriations plus non-fund charges.
Total S and A; the difference must match the working capital change.
Spot-check using the working capital schedule. If it fails, look for an unadjusted depreciation, sale of asset or proposed dividend.

Common mistakes in Sources and Applications of Funds

Showing depreciation as an application of funds
Depreciation is an expense, so students treat it as a use of money.
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
Students confuse the book gain or loss with the cash received.
Fix: Show only the sale proceeds as a source. Add back the loss, or deduct the profit, in the FFO calculation.
Including changes in debtors, stock or creditors in the statement
Students treat every balance sheet change as a flow.
Fix: Current items go into the statement of changes in working capital only. The fund flow statement uses non-current items and FFO.
Taking the increase in reserves as FFO without checking
The reserve and P&L balance seem to represent profit.
Fix: Reconstruct profit from the P&L balance change, then add back transfers to reserves and other appropriations.
Ignoring proposed dividend or treating it wrongly
Students are unsure whether it is a current liability.
Fix: Follow the question. If proposed dividend is treated as a non-current appropriation, add it back to profit and show dividend paid as an application when paid. If it is a current liability, state that treatment clearly.
Showing issue of shares at premium at the face value only
Students overlook the securities premium account.
Fix: Source from share issue = increase in share capital plus increase in securities premium, unless a bonus issue (not a source).

Worked examples

Example 1

From the following, calculate funds from operations. Net profit for the year is ₹2,40,000. This is before appropriations and after charging depreciation, loss on sale of machinery, goodwill written off and interest on debentures. Items: depreciation ₹60,000; loss on sale of machinery ₹8,000; goodwill written off ₹20,000; transfer to general reserve ₹30,000 (shown as an appropriation, not deducted in the ₹2,40,000); profit on sale of investments ₹12,000 (credited in arriving at the ₹2,40,000); interest on debentures ₹15,000 (treat as an operating charge, so it is not added back).

Show the solution

Start with net profit before appropriations: ₹2,40,000. The transfer to general reserve was not deducted, so no add-back is needed.
Add depreciation: ₹60,000.
Add loss on sale of machinery: ₹8,000.
Add goodwill written off: ₹20,000.
Total additions = 60,000 + 8,000 + 20,000 = ₹88,000.
Deduct profit on sale of investments: ₹12,000.
Interest on debentures is treated as an operating charge, so no adjustment.
FFO = 2,40,000 + 88,000 − 12,000 = ₹3,16,000.

Answer: Funds from operations = ₹3,16,000.

Example 2

Extracts from the balance sheets of Kaveri Traders Ltd.: Equity share capital rose from ₹5,00,000 to ₹6,50,000, with securities premium rising from ₹20,000 to ₹50,000 (all through a fresh issue). 12% debentures fell from ₹3,00,000 to ₹2,00,000 (redeemed at par). Plant at cost less depreciation was ₹4,00,000 and ₹5,10,000. Depreciation charged was ₹50,000. A plant with book value ₹30,000 was sold at a loss of ₹5,000. Funds from operations were ₹2,10,000; this figure is already after adding back depreciation and the loss on sale of plant. Dividend paid was ₹40,000. Prepare the statement of sources and applications of funds, and find the change in working capital. (No working capital schedule is given, so the result is taken from the statement itself.)

Show the solution

Share issue source = (6,50,000 − 5,00,000) + (50,000 − 20,000) = 1,50,000 + 30,000 = ₹1,80,000.
Sale proceeds of plant = 30,000 − 5,000 = ₹25,000.
Plant account (net): Opening 4,00,000 + Purchases − Depreciation 50,000 − Book value of sale 30,000 = Closing 5,10,000.
Purchases = 5,10,000 − 4,00,000 + 50,000 + 30,000 = ₹1,90,000.
Sources: FFO 2,10,000 + share issue 1,80,000 + sale of plant 25,000 = ₹4,15,000.
Applications: purchase of plant 1,90,000 + redemption of debentures 1,00,000 + dividend 40,000 = ₹3,30,000.
Net source = 4,15,000 − 3,30,000 = ₹85,000, an increase in working capital.

Answer: Total sources ₹4,15,000; total applications ₹3,30,000; working capital increased by ₹85,000.

Exam tips

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.
In MCQs, check whether the item touches a non-current account. If it only moves between current accounts, it is not a source or application.
Tally your statement with the working capital change at the end. The match is the quickest self-check.

Practice questions from Fund Flow Statement - Preparation and Analysis

Sources and Applications of Funds in other exams

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

Sources and Applications of Funds: frequently asked questions

What are the main sources of funds?

The main sources are funds from operations, issue of shares and debentures, raising long-term loans, and sale of non-current assets or investments. Each one increases funds from outside the working capital pool.

Is depreciation a source of funds?

No. Depreciation is a non-cash charge that is added back to profit to find funds from operations. It does not bring in funds by itself, so it should not be shown as a separate source.

Why is loss on sale of an asset added back in funds from operations?

The loss was deducted in arriving at profit but no funds left the business because of it. The sale proceeds are shown separately as a source. Adding the loss back avoids double counting.

Is payment of tax an application of funds?

It depends on how the question treats it. If provision for tax is treated as a non-current item or an appropriation, tax paid is an application. If it is a current liability, it appears in the working capital changes. State your treatment.