by Generally, the statement consists of two sections: the source (where the money has come from) and the application (where the money has gone).
The sources of funds originate from:
- A decrease in liabilities or an increase in assets
- Net income after tax
- The disposal or revaluation of fixed assets
- Proceeds of loans obtained
- Proceeds of shares that were issued
- Repayments received on loans previously granted by the company
- Any increase in net working capital
The application of funds includes:
- Losses to be met by the company
- The purchase of fixed assets/investments
- The full or partial payment of loans
- Granting of loans
- Liability for taxes
- Dividends paid or proposed
- Any decrease in net working capital
Sources of Funds
Items to be shown under the head Sources of Funds are as follows:
- Issue of Shares and Debentures for Cash: The total amount received from the Issue of Shares or Debentures is to shown under this head. But, the Issue of bonus Shares or Conversion of Debentures into Equity Shares or Shares issued to vendors shall not be shown here as there is no inflow of Cash
- Long Term Loans: The Amount received on raising Long Term Loans is shown under this head. Short Term Loans are not to be shown here as their treatment has already been done while preparing the Statement of Changes in Working Capital.
- Sale of Investments and other Fixed Assets: The Total Amount received on the sale of Investments and other Fixed Assets is to be shown under this head.
- Funds from Operations: The Funds generated from Operations as computed in Step II are also required to be shown here.
- Decrease in Working Capital: This would be the Balancing Figure of the Statement and will come from change in Working Capital Statement
Application of Funds
Items to be shown under Application of Funds are as follows:
- Purchase of Fixed Assets and Investments: The Cash Payment made for purchase of Fixed Assets and Investments is an application of Funds. But if the purchase if made by issue of shares or debentures, such a transaction will not constitute application of funds. Similarly, if the purchases are on credit, these will not constitute fund applications.
- Redemption of Debentures, Preference Shares and Repayment of Loan: Payment made including Premium (less: Discount) is to be taken as fund application
- Payment of Dividend & Tax: Payment of Dividend and Tax are to be taken as applications of fund if the provisions are excluded from Current Liabilities and Current Provisions are added back to profit to determine the “Funds from Operations”
- Increase in Working Capital: This would be the Balancing Figure of the Statement and will come from change in Working Capital Statement
