How to Prepare Funds Flow Statement?

The below mentioned article will guide you about how to prepare funds flow statement.

In order to prepare funds flow statement, on total resources basis, successive balance sheet are compared and changes in each balance sheet item is recorded and further designated as a source of funds or a use of funds.

The comparison of successive balance sheets will generally lead to following sources and uses of funds:

Sources of Funds:

(i) Increase in owner’s equity,

(ii) Increase in liability, and

(iii) Decrease in an asset.

Uses of Funds:

(i) Decrease in owners’ equity,

(ii) Decrease in liability, and

(iii) Increase in an asset.

It is important to note that when funds are defined as total resources basis, the sources of funds are equal to the uses of funds as assets are always equal to owners’ equity plus liabilities. Illustrative Problem 21 illustrates funds flow statement on total resources basis.

Illustrative Problem:

The following is the balance sheets of a company for the years 2007 and 2008 and an income statement for the year 2008:

The above funds flow statement contains more detained information than the previous one. This statement contains the following additional information:

(i) Change in reserve and surplus, which is equal to net income, is expressed as follows:

Profit before tax

Less: taxes

Less: dividends

Profit before tax is a source of funds, and taxes and dividends have been, therefore, shown as uses of funds.

(ii) Gross increase in fixed assets has been shown as uses of funds.

(iii) Depreciation for the year 2008 is shown as source of funds.