Fund Flow and Cash Flow Statements: A Worked Example
Two balance sheets, one year apart. Here is how to turn them into both statements and what a banker reads from each.
A balance sheet is a photo of one date. A banker needs the film: where did the money come from this year, and where did it go? Two statements answer that, and both are built from the same pair of balance sheets.
A fund flow statement tracks working capital (current assets minus current liabilities). It sets long-term sources against long-term uses and shows whether the gap was filled from working capital. A cash flow statement tracks cash only, split under AS-3 into operating, investing and financing activities. Banks lean on the cash flow statement to judge a borrower's liquidity, and on the fund flow statement to spot short-term money funding long-term assets.
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The Worked Example: Two Balance Sheets
Figures in ₹ lakh. Extra facts for the year: depreciation ₹15 lakh, dividend paid ₹5 lakh, no fixed asset sold.
Share capital
Year 1
100
Year 2
120
Change
+20
Reserves and surplus
Year 1
40
Year 2
55
Change
+15
Term loan
Year 1
60
Year 2
50
Change
-10
Sundry creditors
Year 1
30
Year 2
40
Change
+10
Bank cash credit
Year 1
20
Year 2
25
Change
+5
Total liabilities
Year 1
250
Year 2
290
Change
Net fixed assets
Year 1
120
Year 2
150
Change
+30
Inventory
Year 1
60
Year 2
70
Change
+10
Debtors
Year 1
40
Year 2
45
Change
+5
Cash and bank
Year 1
30
Year 2
25
Change
-5
Total assets
Year 1
250
Year 2
290
Change
| Item | Year 1 | Year 2 | Change |
|---|---|---|---|
| Share capital | 100 | 120 | +20 |
| Reserves and surplus | 40 | 55 | +15 |
| Term loan | 60 | 50 | -10 |
| Sundry creditors | 30 | 40 | +10 |
| Bank cash credit | 20 | 25 | +5 |
| Total liabilities | 250 | 290 | |
| Net fixed assets | 120 | 150 | +30 |
| Inventory | 60 | 70 | +10 |
| Debtors | 40 | 45 | +5 |
| Cash and bank | 30 | 25 | -5 |
| Total assets | 250 | 290 |
Three Numbers to Find First
- 1
Net profit for the year: ₹20 lakh
Reserves rose by ₹15 lakh after paying ₹5 lakh of dividend, so profit was 15 + 5 = ₹20 lakh.
- 2
Capital expenditure: ₹45 lakh
Net fixed assets rose by ₹30 lakh even after ₹15 lakh of depreciation was charged, so new assets bought = 150 - 120 + 15 = ₹45 lakh.
- 3
Funds from operations: ₹35 lakh
Add back non-cash charges to net profit: 20 + 15 depreciation = ₹35 lakh. Depreciation is not a source of money. It is added back only because it was deducted without any cash leaving the business.
Step 1: Schedule of Changes in Working Capital
Bank cash credit is a current liability here, as in a banker's assessment.
Current assets (inventory + debtors + cash)
Year 1
130
Year 2
140
Effect on working capital
Up 10
Current liabilities (creditors + cash credit)
Year 1
50
Year 2
65
Effect on working capital
Down 15
Net working capital
Year 1
80
Year 2
75
Effect on working capital
Decrease of 5
| Item | Year 1 | Year 2 | Effect on working capital |
|---|---|---|---|
| Current assets (inventory + debtors + cash) | 130 | 140 | Up 10 |
| Current liabilities (creditors + cash credit) | 50 | 65 | Down 15 |
| Net working capital | 80 | 75 | Decrease of 5 |
Step 2: Fund Flow Statement
A decrease in working capital is a source. An increase would be an application.
Funds from operations
₹ lakh
35
Applications
Purchase of fixed assets
₹ lakh
45
Issue of share capital
₹ lakh
20
Applications
Repayment of term loan
₹ lakh
10
Decrease in working capital
₹ lakh
5
Applications
Dividend paid
₹ lakh
5
Total
₹ lakh
60
Applications
Total
₹ lakh
60
| Sources | ₹ lakh | Applications | ₹ lakh |
|---|---|---|---|
| Funds from operations | 35 | Purchase of fixed assets | 45 |
| Issue of share capital | 20 | Repayment of term loan | 10 |
| Decrease in working capital | 5 | Dividend paid | 5 |
| Total | 60 | Total | 60 |
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What the Banker Reads Into It
Long-term sources were 35 + 20 = ₹55 lakh. Long-term uses were 45 + 10 + 5 = ₹60 lakh. The ₹5 lakh shortfall came out of working capital, so the current ratio slipped from 130/50 = 2.6 to 140/65 = 2.15. One year of this is not alarming. Several years of long-term uses running ahead of long-term sources is the classic sign of short-term bank finance being diverted into fixed assets.
Step 3: Cash Flow Statement (Indirect Method)
To keep the example short, interest is left inside net profit. Under AS-3 a non-financial company shows interest paid under financing activities.
| Line | ₹ lakh |
|---|---|
| Net profit | 20 |
| Add: depreciation | 15 |
| Less: increase in inventory | (10) |
| Less: increase in debtors | (5) |
| Add: increase in creditors | 10 |
| A. Cash from operating activities | 30 |
| Purchase of fixed assets | (45) |
| B. Cash from investing activities | (45) |
| Issue of shares | 20 |
| Repayment of term loan | (10) |
| Dividend paid | (5) |
| Increase in bank cash credit | 5 |
| C. Cash from financing activities | 10 |
| Net change in cash (A + B + C) | (5) |
| Check: cash went from 30 to 25 | (5) |
Fund Flow Versus Cash Flow
Meaning of 'funds'
Fund flow statement
Net working capital
Cash flow statement
Cash and cash equivalents
Current assets and liabilities
Fund flow statement
Netted into one line: change in working capital
Cash flow statement
Each change shown inside operating cash flow
Layout
Fund flow statement
Sources and applications
Cash flow statement
Operating, investing, financing (AS-3)
Best for
Fund flow statement
Long-term sources vs long-term uses
Cash flow statement
Short-term liquidity and repaying capacity
| Point | Fund flow statement | Cash flow statement |
|---|---|---|
| Meaning of 'funds' | Net working capital | Cash and cash equivalents |
| Current assets and liabilities | Netted into one line: change in working capital | Each change shown inside operating cash flow |
| Layout | Sources and applications | Operating, investing, financing (AS-3) |
| Best for | Long-term sources vs long-term uses | Short-term liquidity and repaying capacity |
The Sources Versus Uses Traps
- check_circleAn increase in a current asset is a use of cash. Stock that went up by ₹10 lakh soaked up ₹10 lakh.
- check_circleAn increase in a current liability is a source of cash. Creditors who waited longer funded ₹10 lakh of the business.
- check_circleA decrease in cash is a source in the balancing sense: the firm spent from its own cash balance.
- check_circleDepreciation is added back, not 'earned'. Remove it and funds from operations falls, but cash in the bank does not change.
- check_circleOn sale of a fixed asset, the full sale price is the source. Any profit on the sale is deducted from funds from operations so it is not counted twice.
- check_circleIn the fund flow statement, a net increase in working capital sits on the applications side and a net decrease on the sources side.
How the IIBF Exam Tests This
- check_circleFunds from operations: net profit plus depreciation and other non-cash or non-operating debits, less non-operating credits such as profit on sale of assets.
- check_circleClassification: interest and dividend received go under investing, interest and dividend paid under financing, for a non-financial company under AS-3.
- check_circleCapex from two balance sheets: closing net block minus opening net block plus depreciation (plus book value of anything sold).
- check_circleReading the result: long-term uses funded by short-term sources means a falling current ratio and a weaker net working capital.
FAQs
What is the difference between a fund flow and a cash flow statement?expand_more
A fund flow statement explains the change in net working capital between two balance sheet dates. A cash flow statement explains the change in cash, split into operating, investing and financing activities. Both use the same two balance sheets.
Is depreciation a source of funds?expand_more
No. It is added back to net profit because it was charged without any cash going out. The actual source is the operating profit before that non-cash charge.
Why is an increase in working capital an application of funds?expand_more
Because more money is now locked in stock, debtors or cash net of current liabilities. That money had to come from somewhere, so it is shown as a use.
Why do bankers prefer the cash flow statement?expand_more
It shows whether the business generates enough cash from operations to pay interest and instalments, which a profit figure alone cannot show.
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