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Cosntruction of funds flow statement

(a)    Basic principles of funds flow statement:

Following are the basic principles on which hthe construction of funds flow statement rests:

(1)    Any increase in assets involves outflow of funds.
(2)    Any decrease in assets involves inflow of funds.
(3)    Any increase in liabilities involves inflow of funds.
(4)    Any decrease in liabilities involves outflow offunds.

(b)    Process of construction:

The basic statements which are used while preparing the funds flow statement are the comparative balance sheets as on two different dates. The funds flow statement, arranges the amounts appearing on the balance sheets after some elimination combinations and reclassifications, into two main groups.

(a)    Sources of funds.
(b)    Application of funds.

Following is the proforma in which hfunds flow statement can be prepared: 

Sources Applications
1.    Issue of shares Redemption of shares
2.    Issue of debentures Redemption of debentures
3.    Receipts of term loans Term loan repayments
4.    Receipts of fixed deposits/loans Purchase of fixed assets
5.    Sale of fixed assets Purchase of investments
6.    Sale of investments Repayment of deposits/loans
7.    Non operating income Non operating expenses

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