Funds flow statement reflects the change in working capital during a period through those transactions which affect the funds – termed as ‘cross transactions’. The change is shown as a ‘consolidated figure’. However it is preferable to prepare the ‘working capital statement’ which shows the complete details of the contribution of each item of current asset and current liability towards the overall change in the working capital.

Working Capital Statement (or) Schedule of Changes in Working Capital:

The Statement of change in working capital is concerned with the current assets and current liabilities alone, as they are shown in the Balance Sheets of the current year and the previous year. All non-current assets and non-current liabilities, profits and losses, additional information available are completely ignored.

Each Current asset and current liability in the period’s Balance Sheet is compared with those shown in the previous period’s Balance Sheet. Increase or decrease in each of the assets and liabilities is noted. The effect of such increase or decrease during the period in each item individually on the working capital is recorded. Finally the overall change in the working capital is calculated.

It is possible that working capital might have increased during a period or it might have decreased. The working capital statement shows such ‘increase’ or ‘decrease’ in the working capital as the final result.


The following is the ‘Principle’ for preparation of Working Capital Statement:

Increase in Current Asset – Increases Working Capital

Decrease in Current Asset – Decreases Working Capital

Increase in Current Liability – Decreases Working Capital


Decrease in Current Liability – Increases Working Capital

The following is a specimen of the Working Capital Statement:

Items of Funds Flow Statement:

Funds flow statement is composed of two categories of items:


(i) Sources of funds and

(ii) Applications of funds.

It is necessary to ascertain them in order to prepare the funds flow statement.


The ‘transaction analysis’ or ‘identification of transactions’ which causes flow of funds is the basis on which different sources and applications of funds are identified.

However, the following are the usual sources and applications of funds:

The following is the specimen of funds flow statement:

The above form is the popular and preferable one. However, funds flow statement can also be prepared-in an account format as follows:

I. Internal Sources of Funds (or) Funds from Operations:

Funds from operations are the only internal source of funds. All the ‘non funds items’ or non- operating expenses and non-operating incomes should be adjusted in the net profit to ascertain funds from operations. This can be done by preparing an adjusted profit and loss account or by preparing a statement of funds from operations. The former method is preferable when balance sheets at the Beginning and end of a period are available. When profit and loss account or information alone is available, the latter method can be adopted.


(A) Items to be added back to Net Profit (or) to be shown on the Debit Side of Adjusted Profit and Loss Account, if they were Previously Debited to Profit and Loss Account:

1. Book Transfers or Paper Transactions which do not Result in Outflow of Funds:

Depreciation on fixed assets;

Intangible assets written off like goodwill, patents.


Fictitious assets written off like preliminary expenses, discount on shares and debentures.

Transfer to reserves like general reserve, sinking fund;

2. Non Trading Expenses or Losses:

Loss on sale of fixed assets.

Premium on redemption of debentures and preference shares;

Loss on sale of long term investments;


3. Provisions in the Nature of Appropriation of Profits:

Provision for Income tax

Proposed Dividend

(B) Items to be reduced from Net Profit (or) to be shown on the Credit Side of Adjusted Profit and Loss Account, if they were Previously Credited to Profit and Loss Account:

1. Non Trading Incomes:

Interest and dividend on long term investments.

Income Tax refund.

2. Non Trading Gains:

Profit on sale of fixed assets;

Profit on sale of non-trading investments.

Appreciation in fixed assets.

The following is the specimen of adjusted profit and loss account to ascertain funds from operations:

If profit and loss balances are not separately given in the balance sheets, balances of ‘retained earnings’ or ‘Reserves and surplus’ can be used as opening and closing balances. This is logical since the net profit would have merged into the ‘retained earnings’ or ‘Reserves’ in the absence of a separate profit and loss account balance.

The following is the specimen of statement of funds from operations, which is an alternative to the adjusted profit and loss account:

II. External Sources of Funds:

The internal sources of funds are generated through routine operations of business like purchases and sales.

The external sources are received from sources outside the organisation and are not routine to the business.

1. Issue of Long Term Instruments:

(a) Fresh issue of equity shares;

(b) Issue of preference shares;

(c) Issue of debentures or bonds;

(d) Premium on issue of shares and debentures.

2. Long Term Borrowings:

Bank loans and overdrafts;

Public deposits

Mortgage loans.

3. Sale of Non-Current Assets:

Sale of fixed assets like buildings and machinery.

Sale of non-trading investments.

4. Non-Operating Incomes:

Income from investments Income tax refund.

Applications of Funds:

Funds mobilised or received from various sources may be applied for different purposes.

The following are the usual applications of funds:

1. Redemption of Shares and Debentures:

Redemption of preference shares.

Redemption of debentures.

2. Repayment of Loans:

Bank loans repaid.

Mortgage loans repaid.

Public deposits repaid.

3. Payment of dividend and tax.

4. Purchase of fixed assets.

5. Purchase of long term investments.

The following is a comprehensive picture of funds flows:

Synchronising the flow of funds to achieve liquidity and profitability is the long term objective of managing funds flows.

Some Points to Note for Preparation of Funds Flow Statement:

1. Treatment of Tax and Dividend:

(a) It is preferable to treat them as non-current items if nothing is specified.

(b) If ‘tax payable’ or ‘dividend payable’ is given on the balance sheet liabilities side, they are to be taken as current liabilities. Provision for tax and proposed dividend are non-current. Once tax is assessed or dividend is declared, it becomes a liability to be paid off immediately.

2. Tax and Dividend given in different ways:

(a) If provision for tax and dividend are given in the adjustments alone and nothing is given in the balance sheets, the given amount is debited to adjusted profit and loss account. It is also shown as application in funds flow statement. It is presumed that provision is made and payment is also made immediately.

(b) If provision for tax and proposed dividend are given in the balance sheets alone and nothing is mentioned in the adjustments:

The opening balance of these items can be assumed to have been paid in cash during the current year. The opening balances are shown as application of funds. The closing balances are debited to the adjusted profit and loss account as provisions made in the current year.

(c) If provision for tax and proposed dividend are given in the balance sheet as well as in adjustments:

It is necessary to prepare separate ledger accounts for them. From those accounts, the tax paid and dividend paid are shown as applications of funds. The provisions made are shown in the debit side of adjusted profit and loss account.

(d) Interim dividend should be treated separately from proposed dividend.

3. Investments:

‘Trading investments’ or ‘current investments’ or ‘Short-term investments’ should be taken as current assets.

Non trading investments and income thereon should be treated as non-current items.

If nothing is mentioned, investments’ may be treated as ‘Non-Current’.

4. Reconciliation of Profits:

When ‘Reported Income’ or net profit for the current year is given along with opening and closing balance sheets, it is better to reconcile the profits. Dividend paid may be found as balancing figure.

Net profit + Opening balance of Profit and Loss – Transfer to reserve – Closing balance of Profit and Loss = Dividend.

5. On the Assets side of the Given Balance Sheets:

(a) Any decrease in intangible and fictitious assets like goodwill, patents, preliminary expenses, discount on shares, etc., should be assumed as ‘amortisation’ and should be debited to adjusted profit and loss account, if they were previously debited to profit and loss account.

(b) Any decrease in investments can be taken as sale and increase may be ‘assumed as purchase.

(c) Any increase in fixed assets is usually due to purchase. Decrease in fixed assets can be due to sale or depreciation.

6. On the Liability side of the Given Balance Sheets:

(a) Increase in share capital is due to fresh issue of shares. Increase in share premium is due to premium collected on new issue made.

(b) Decrease in redeemable preference shares or debentures is because of redemption carried out.

(c) Increase in loans is ‘loans borrowed’ and decrease in loans is ‘loans-repaid’.

Hidden Information:

As mentioned in 5 and 6 above, the meaning of changes in many items on the assets side or liability side may be obvious. However a lot of informations are ‘Hidden’ and it should be ‘Dugout’ as ‘Balancing Figures’ by preparing relevant accounts. The following are some of the examples for bringing out hidden information.

(1) Provision for Tax Account:

It may yield tax paid or provision made in the current year as balancing figure.

(2) Proposed Dividend Account:

Proposed dividend account is prepared on the same lines as ‘provision for tax’ account shown above may reveal either ‘Dividend Paid’ or current year’s proposed dividend as balancing figure.

(3) Fixed Asset Account:

Asset purchased or asset sold or depreciation or profit or loss or sale may be found as balancing figure by preparing a fixed asset account.

(4) Provision for Depreciation Account:

In this account current year’s depreciation or depreciation on asset sold can be found as Hidden information.

(5) Investments Account:

Sale or purchase of long term investments can be found from Investments account. It is possible to find either profit or loss on sale of such investments also.

Depending on the details available, the above mentioned different accounts can be prepared to find out missing information as “Balancing Figures”.