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Preparation of a Funds Flow Statement involves analyzing changes in a company’s financial position by comparing balance sheet data from two periods. It helps in understanding the sources and uses of funds over time, providing insights into the company’s financial activities and liquidity position. Here’s how to prepare a Funds Flow Statement and analyze its components:

  1. Preparation of Funds Flow Statement:

    The Funds Flow Statement typically starts with the balance sheet data from the beginning and end of the period under consideration. The statement outlines the sources and uses of funds, categorizing changes in various balance sheet items.

    Example Funds Flow Statement:

    Funds Flow Statement

    For the Year Ended [Date]

    Sources of Funds:
    Opening Cash Balance [X]
    Net Increase in Working Capital (Change in Current Assets Change in Current Liabilities) [Y]
    Proceeds from Issuance of Common Stock [Z]
    Proceeds from LongTerm Borrowing [A]
    Total Sources of Funds [X + Y + Z + A]

    Uses of Funds:
    Purchase of Fixed Assets [B]
    Repayment of LongTerm Debt [C]
    Payment of Dividends [D]
    Net Decrease in Working Capital (Change in Current Assets Change in Current Liabilities) [E]
    Total Uses of Funds [B + C + D + E]

    Net Increase (Decrease) in Cash and Cash Equivalents:
    Total Sources of Funds Total Uses of Funds = Net Increase (Decrease) in Cash [X + Y + Z + A (B + C + D + E)]

  2. Analysis of Funds Flow Statement:
    • Sources of Funds: Analyze the sources of funds to understand how the company financed its operations and investments. Higher sources of funds may indicate increased profitability, capital raising activities, or efficient working capital management.
    • Uses of Funds: Evaluate the uses of funds to identify where the company allocated its resources. Higher uses of funds may indicate investment in fixed assets, debt repayment, or shareholder distributions.
    • Net Increase (Decrease) in Cash: Assess the net increase or decrease in cash and cash equivalents to understand the company’s liquidity position. A positive value indicates an increase in cash, while a negative value indicates a decrease. Positive changes in cash may signal healthy financial performance and liquidity, while negative changes may indicate cash outflows exceeding inflows.
    • Working Capital Changes: Analyze changes in working capital to understand the company’s operating cycle and liquidity management. Positive changes may indicate improved efficiency or increased sales, while negative changes may suggest working capital constraints or declining sales.
    • Investing and Financing Activities: Examine the company’s investing and financing activities to assess its capital structure and growth strategy. Investment in fixed assets may indicate expansion plans, while debt repayment or dividend payments may reflect financial discipline or shareholder returns.

By analyzing the Funds Flow Statement, stakeholders can gain insights into the company’s financial health, liquidity position, and capital allocation decisions. It helps in identifying trends, risks, and opportunities for strategic planning and decision-making.