A Funds Flow Statement illustrates the movement of funds within a business by showing the sources and uses of funds over a specific period. This example demonstrates how a company generates funds through various activities and how those funds are allocated across operations, investments, and financing.
1. Scenario for Funds Flow Statement
Let’s consider the financial data of ABC Ltd for the year ending December 31, 2023. The company has undergone several financial transactions affecting its working capital and overall financial position.
A. Balance Sheet Data
| Particulars | Beginning of Year ($) | End of Year ($) |
|---|---|---|
| Current Assets | 100,000 | 130,000 |
| Current Liabilities | 60,000 | 70,000 |
| Fixed Assets | 150,000 | 170,000 |
| Long-Term Debt | 50,000 | 30,000 |
| Share Capital | 80,000 | 100,000 |
| Retained Earnings | 60,000 | 80,000 |
B. Additional Information
- Depreciation for the year: $10,000
- Dividends paid: $15,000
- Sale of equipment: $5,000
2. Step-by-Step Preparation of Funds Flow Statement
To prepare the funds flow statement, we will follow these steps:
- Calculate the change in working capital.
- Determine the sources of funds.
- Identify the uses of funds.
3. Calculation of Changes in Working Capital
Working Capital = Current Assets – Current Liabilities
- Beginning of Year Working Capital = 100,000 – 60,000 = 40,000
- End of Year Working Capital = 130,000 – 70,000 = 60,000
Increase in Working Capital = 60,000 – 40,000 = 20,000
Interpretation: The company’s working capital increased by $20,000, indicating a greater investment in current assets relative to current liabilities.
4. Sources of Funds
The sources of funds represent all inflows that contributed to the company’s financial resources during the year.
- Funds from Operations:
- Net increase in retained earnings: $80,000 – $60,000 = $20,000
- Add: Depreciation (non-cash expense): $10,000
- Total Funds from Operations: $30,000
- Sale of Equipment: $5,000
- Issuance of Share Capital:
- Increase in share capital: $100,000 – $80,000 = $20,000
- Total Sources of Funds:
- $30,000 (Funds from Operations) + $5,000 (Sale of Equipment) + $20,000 (Issuance of Shares) = $55,000
5. Uses of Funds
The uses of funds represent all outflows, including investments, debt repayments, and increases in working capital.
- Purchase of Fixed Assets:
- Increase in fixed assets: $170,000 – $150,000 = $20,000
- Repayment of Long-Term Debt:
- Reduction in long-term debt: $50,000 – $30,000 = $20,000
- Dividends Paid: $15,000
- Increase in Working Capital: $20,000
- Total Uses of Funds:
- $20,000 (Fixed Assets) + $20,000 (Debt Repayment) + $15,000 (Dividends) + $20,000 (Working Capital) = $75,000
6. Funds Flow Statement for ABC Ltd
| Sources of Funds | Amount ($) |
|---|---|
| Funds from Operations | 30,000 |
| Sale of Equipment | 5,000 |
| Issuance of Shares | 20,000 |
| Total Sources of Funds | 55,000 |
| Uses of Funds | Amount ($) |
|---|---|
| Purchase of Fixed Assets | 20,000 |
| Repayment of Long-Term Debt | 20,000 |
| Dividends Paid | 15,000 |
| Increase in Working Capital | 20,000 |
| Total Uses of Funds | 75,000 |
7. Analysis and Interpretation
Net Funds Movement: The total uses of funds ($75,000) exceed the total sources of funds ($55,000) by $20,000. This shortfall suggests that ABC Ltd may have used existing cash reserves or secured short-term financing to cover the gap.
Key Observations:
- Strong Operational Performance: The company generated $30,000 from operations, indicating profitability and effective cost management.
- Investment in Growth: Significant investments in fixed assets ($20,000) suggest a focus on expanding operational capacity.
- Debt Reduction: The repayment of long-term debt ($20,000) indicates a move towards reducing financial liabilities and improving financial health.
- Dividend Payout: Payment of dividends ($15,000) reflects the company’s commitment to returning value to shareholders.
8. The Value of Funds Flow Statements
This example illustrates how a Funds Flow Statement provides a comprehensive overview of a company’s financial activities. It highlights the sources and uses of funds, offering insights into operational performance, investment strategies, and financial management. By understanding these movements, businesses can make informed decisions, plan for future growth, and ensure long-term financial stability.