SSAP 10 (Statement of Standard Accounting Practice 10) outlines the guidelines for preparing the Statement of Source and Application of Funds. This financial statement, often referred to as the Funds Flow Statement, provides valuable insights into how a company generates and utilizes its financial resources over a specific accounting period. By detailing the sources of funds and their application, SSAP 10 helps businesses, investors, and stakeholders understand the movement of funds, assess liquidity, and evaluate financial stability.
1. Purpose of SSAP 10
The primary objective of SSAP 10 is to enhance the transparency of financial reporting by providing a clear view of a company’s cash and fund movements. It bridges the gap between the income statement and the balance sheet, offering a comprehensive picture of how a company finances its activities and where it allocates its resources.
A. Key Objectives of SSAP 10
- Highlighting Financial Movements: Shows how funds are generated from operations, financing, and investing activities.
- Evaluating Liquidity: Provides insights into a company’s ability to meet its short-term obligations and manage working capital.
- Assessing Financial Health: Helps stakeholders evaluate the financial strategies employed by the company and their impact on financial stability.
2. Components of the Statement of Source and Application of Funds
The Funds Flow Statement prepared under SSAP 10 consists of two primary sections:
- Sources of Funds: Identifies where the company’s funds have come from during the accounting period.
- Application of Funds: Details how these funds have been utilized within the business.
3. Sources of Funds
Sources of Funds refer to the inflows of financial resources into the business. These can come from internal operations or external financing activities.
A. Common Sources of Funds
- Funds from Operations: Net profit adjusted for non-cash items like depreciation and amortization.
- Issuance of Share Capital: Funds raised through issuing new shares to investors.
- Borrowings: Loans, debentures, or other forms of debt financing obtained during the period.
- Sale of Fixed Assets: Proceeds from selling property, plant, equipment, or other long-term assets.
- Reduction in Working Capital: Cash freed up by decreasing current assets or increasing current liabilities.
4. Application of Funds
Application of Funds refers to how the company uses the financial resources generated during the accounting period. This section highlights where the funds were allocated, whether for operational needs, investments, or debt repayments.
A. Common Applications of Funds
- Purchase of Fixed Assets: Investments in property, plant, equipment, or other long-term assets.
- Repayment of Loans: Settling outstanding debts or financial obligations.
- Payment of Dividends: Distributing profits to shareholders as dividends.
- Increase in Working Capital: Tying up funds in current assets like inventory and accounts receivable.
- Purchase of Investments: Acquiring new investments or financial instruments.
5. Example of a Statement of Source and Application of Funds
The following example illustrates how to prepare a Funds Flow Statement in accordance with SSAP 10.
A. Example: Funds Flow Statement for ABC Ltd
| Sources of Funds | Amount ($) |
|---|---|
| Funds from Operations | 80,000 |
| Issuance of Share Capital | 50,000 |
| Loan Raised | 40,000 |
| Sale of Fixed Assets | 30,000 |
| Total Sources of Funds | 200,000 |
| Application of Funds | Amount ($) |
|---|---|
| Purchase of Fixed Assets | 90,000 |
| Repayment of Loans | 40,000 |
| Payment of Dividends | 20,000 |
| Increase in Working Capital | 50,000 |
| Total Application of Funds | 200,000 |
Explanation: In this example, the total sources of funds match the total applications of funds, demonstrating how ABC Ltd generated and utilized its financial resources during the period.
6. Importance of SSAP 10 and Funds Flow Statements
The Funds Flow Statement prepared under SSAP 10 plays a critical role in financial reporting and decision-making. It provides valuable insights into a company’s liquidity, financial health, and operational efficiency.
A. Benefits of SSAP 10
- Transparency: Enhances financial transparency by clearly outlining the sources and uses of funds.
- Liquidity Management: Helps businesses assess their ability to meet short-term obligations and manage working capital effectively.
- Strategic Planning: Provides insights for strategic decision-making, such as financing new projects or managing debt levels.
- Performance Evaluation: Assists stakeholders in evaluating the company’s financial performance and efficiency in utilizing resources.
7. Limitations of the Funds Flow Statement
While the Funds Flow Statement offers valuable insights, it also has certain limitations that users should consider.
A. Key Limitations
- Historical Focus: The statement reflects past financial activities and may not provide forward-looking insights.
- Non-Cash Transactions Excluded: It primarily focuses on cash and fund movements, excluding non-cash transactions like depreciation or stock-based compensation.
- Complex Interpretation: Understanding the implications of fund movements requires a thorough analysis of the company’s overall financial context.
8. Understanding SSAP 10 and Funds Flow Statements
SSAP 10 provides a standardized framework for preparing the Statement of Source and Application of Funds, offering valuable insights into a company’s financial activities. By detailing how funds are generated and utilized, the statement helps businesses manage liquidity, plan strategically, and communicate financial performance to stakeholders. While it has limitations, when combined with other financial statements, the Funds Flow Statement serves as a powerful tool for comprehensive financial analysis and decision-making.