Unit 3: Fund flow & cash flow statements
Management Accounting notes · PTU syllabus (BCOM 301-18)
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Unit summary
Profit does not tell how funds were raised and used or why cash fell despite profits. Fund flow and cash flow statements answer these questions. This unit covers the meaning and concept of funds, preparation and uses of fund flow statements, differences between fund flow and cash flow statements, and preparation of cash flow statements under AS-3.
After this unit you can
- Explain the concept of funds and flow of funds
- Prepare a schedule of changes in working capital and a fund flow statement
- Distinguish fund flow and cash flow statements
- Prepare a cash flow statement as per AS-3 (indirect method)
PTU syllabus topics
- Meaning and concept of fund flow
- preparation and uses of fund flow statements
- difference between fund flow and cash flow statements
- preparation of cash flow statements as per AS-3 norms
Operating activities
Cash from the main business
Investing activities
Buying and selling long-term assets
Financing activities
Shares, loans and dividends
Topic 1
Meaning and concept of fund flow
- Funds = working capital (current assets − current liabilities) in the fund flow context.
- Flow of funds occurs when a transaction changes working capital — i.e., involves one current and one non-current account.
Accounts involved
One current, one non-current
Both current or both non-current
Example
Issue of shares for cash
Cash collected from debtors
Example 2
Purchase of machinery for cash
Conversion of debentures into shares
- Fund flow statement: a statement showing sources and applications of funds during a period.
Topic 2
Preparation of a fund flow statement
- 1Schedule of changes in working capital
Increase or decrease in each current item
- 2Funds from operations
Adjusted profit and loss account
- 3Prepare accounts for non-current items
Fixed assets, depreciation, provision for tax, dividends
- 4Fund flow statement
Sources = Applications (including change in working capital)
Funds from operations
Funds from operations
Net profit (closing P&L − opening P&L) + Non-fund and non-operating debits (depreciation, goodwill and preliminary expenses written off, loss on sale of fixed assets, transfer to reserves, provision for tax and proposed dividend if treated as non-current) − Non-operating credits (profit on sale of fixed assets, dividend received, refund of tax)
| Sources of funds | Applications of funds |
|---|---|
| Funds from operations | Funds lost in operations |
| Issue of shares and debentures | Redemption of shares/debentures |
| Long-term loans raised | Repayment of long-term loans |
| Sale of fixed assets and investments | Purchase of fixed assets and investments |
| Non-trading income (dividends received) | Payment of tax and dividends (when non-current) |
| Decrease in working capital | Increase in working capital |
Example
Net profit ₹80,000; depreciation ₹20,000; goodwill written off ₹5,000; profit on sale of machine ₹3,000. Funds from operations = 80,000 + 20,000 + 5,000 − 3,000 = ₹1,02,000.
Uses of fund flow statement
- Shows how funds were raised and used; reveals use of long-term funds for short-term needs.
- Helps plan future financing and dividend policy; assesses working capital management.
Topic 3
Fund flow vs cash flow
Concept of funds
Working capital
Cash and cash equivalents
Basis
Accrual
Cash
Use
Long-term financial planning
Short-term cash planning
Working capital changes
Shown in a separate schedule
Adjusted within operating activities
Legal status in India
Not mandatory
Mandatory under AS-3 / Ind AS 7 for most companies
Topic 4
Cash flow statement as per AS-3
AS-3 (revised) requires classification of cash flows into three activities.
Operating activities
Principal revenue-producing activities — receipts from customers, payments to suppliers and employees, income tax
Investing activities
Purchase and sale of fixed assets and investments, interest and dividends received (non-financial company)
Financing activities
Issue and redemption of shares and debentures, borrowings and repayments, dividends and interest paid
- Cash equivalents: short-term, highly liquid investments readily convertible to cash with insignificant risk (maturity ≤ 3 months).
Indirect method of operating cash flow
- 1
Net profit before tax and extraordinary items
- 2
Add non-cash and non-operating charges
Depreciation, amortisation, loss on sale of assets, interest expense
- 3
Less non-operating incomes
Profit on sale of assets, interest/dividend received
- 4
Operating profit before working capital changes
- 5
Adjust working capital
Add decrease in current assets and increase in current liabilities; deduct increase in current assets and decrease in current liabilities
- 6
Less income tax paid
- 7
Net cash from operating activities
Example
Net profit before tax ₹1,50,000; depreciation ₹30,000; profit on sale of land ₹10,000; increase in debtors ₹25,000; decrease in stock ₹5,000; increase in creditors ₹12,000; tax paid ₹40,000. Operating profit before WC changes = 1,70,000; after WC changes = 1,70,000 − 25,000 + 5,000 + 12,000 = 1,62,000; net cash from operating activities = ₹1,22,000.
Exam tip
Interest paid is a financing activity and dividend received is investing for a non-financial company — misclassifying these is the most common error.
Key terms
- Funds
- Working capital in the context of fund flow analysis
- Funds from operations
- Working capital generated by trading operations
- Cash equivalents
- Short-term liquid investments with maturity up to three months
- Operating activities
- Principal revenue-producing activities of an enterprise
- Financing activities
- Activities that change the size and composition of owners' capital and borrowings
Quick revision
- Flow of funds when one current and one non-current account are involved.
- Fund flow: schedule of WC changes + funds from operations + statement.
- Cash flow (AS-3): operating, investing, financing.
- Indirect method starts from net profit and adjusts non-cash items and WC changes.
- Fund flow = working capital basis; cash flow = cash basis.
Important exam questions
Practice questions written to the PTU exam pattern for this unit's syllabus: short answers (Section A style) and long answers (Sections B and C style).
Short-answer questions
- Q1.What is meant by "funds"?
- Q2.When does a flow of funds occur?
- Q3.How are funds from operations calculated?
- Q4.State two uses of a fund flow statement.
- Q5.What are cash equivalents?
- Q6.Classify interest paid and dividend received in a cash flow statement.
Long-answer questions
- Q1.Explain the concept of fund flow and the preparation of a fund flow statement.
- Q2.Distinguish between fund flow and cash flow statements.
- Q3.Explain the classification of cash flows under AS-3.
- Q4.Prepare a cash flow statement using the indirect method with an illustration.
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