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

In a fund flow statement prepared on the working capital concept, which of the following transactions would be shown as a source of funds from operations rather than affecting only the current assets and current liabilities?

Depreciation added back to net profit is the item that appears in funds from operations. It is a non-fund charge that reduces profit without reducing working capital. The other transactions merely shuffle current assets and current liabilities and therefore do not appear in a working capital based fund flow statement.

  1. APurchase of raw materials on credit
  2. BDepreciation charged to the Profit and Loss Account, added back to net profitCorrect
  3. CCollection of cash from a debtor
  4. DPayment to a trade creditor

Explanation

Under the working capital concept, funds from operations starts with net profit and adds back non-fund items such as depreciation, because depreciation reduces profit but does not reduce working capital. The other three transactions only change the composition of current assets or current liabilities, so they do not appear in the statement.

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