What Are Sources And Applications Of Funds Statements?

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Introduction:


The sources and applications of funds statement shows the manner operations of a business have been financed (sources) and how these financial resources have been utilized (applications).


The sources and applications of funds statement is also known as either statement of changes in financial position or funds flow statement.


Why is the statement useful?


The statement of funds and applications of funds statement is useful for the following reasons;

  1. It points out the actual movement of cash during a financial year and thus, establishes a useful connection between the profit statement and the balance sheet.

This connection is highly important because accounting profit is calculated on accruals basis and not on receipt and payment basis.

2. The funds flow statement shows how funds generated from operations and other sources are utilized.

3. The funds floe statement is a source of additional information (others being balance sheet and profit and loss account) to guide investors, shareholders, management and others take better decisions.

4. The funds flow statement will reveal sources of new funds and how they have been applied. It will also reveal the level of risk associated with sources of financing assets acquisitions.

5. The funds flow statement draws the line of demarcation between funds used for expansion and funds used in boosting working capital and,

6. The statement will show how a surplus working capital is employed (invested) and how dearth in working capital is funded.

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What is the procedure for the preparation of the statement?

  1. Study notes to profit and loss and balance sheets. These notes may require adjustments to the provided financial statements.

2. Take note that the funds flow statement is concerned with cash flow from operations and not profits. Profits are calculated by including non cash items such as depreciation and provision. So, earned profit from the year;s operations must be adjusted for non cash items.

3. Profit or loss on sale of fixed assets is calculated by comparing proceeds from sales with the net book value. The net book value is cost less provision for depreciation and depreciation is only a book entry. Therefore , in the sources and applications of funds statement, it’s necessary to add back any depreciation charges or loss on sale of fixed assets shown in the current year’s profit and loss account.

Also exclude from current year’s profit before tax, any revaluation gain or loss on sale of fixed assets given in the current year’s profit and loss account.

4. Movement in working capital items is calculated by subtracting the previous year’s figure from the current year’s figure.

5. The previous year’s dividend proposed should be entered as an application of funds in the current year’s funds flow statement. The rationale behind this is, it’s taken that dividends proposed in the previous year would be paid in the present year.

6. Also the taxation owing would have been paid in the present year

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