spot_img

CAIIB 2022 JUNE MATERIAL | DEFINITION OF FUND FLOW STATEMENT

CAIIB 2022 JUNE MATERIAL | DEFINITION OF FUND FLOW STATEMENT

This article talks about the fund flow statement, in how you can analyze these statements & can get the maximum benefit for trading & decision-making purposes. So, read the article as it is an important topic from the prescribed syllabus of the ABM CAIIB 2022 Exam whether you are preparing for the June 2022 Exams or the upcoming December attempt.

FUND FLOW STATEMENT 

It is a statement prepared with the aim to analyse the reasons for fluctuations or changes in the company’s financial position between two balance sheet dates. It presents the inflow & outflow of funds i.e. from where the funds are sourced and where the funds are applied for a particular period.

It can also be said that a fund flow statement is prepared so that any changes in the working capital position of a company can be explained.

PURPOSES OF FUND FLOW STATEMENT

There might be times when you would have questioned yourself as to why you prepare a fund flow Statement when you already have access to the profit and loss & balance sheet. But if you would have ever analyzed the profit and loss statements and balance sheet then you would have analyzed that these do not provide or explain the reasons for a change or fluctuation in the financial position.

Profit and loss statement & balance sheet usually have 2 years figures i.e., current year & previous years’. And it usually does not explain the reasons for changes. Such as to what extent the long-term funds are used for long-term requirements and to what extent the short-term funds are used for long-term and short-term requirements. 

Following are the reasons for why fund flow statements are prepared. It provides us two types of information: 

  • Sources of funds – The source of money from where it comes in
  • Application of funds – The purposes for which the money is being used.
SYLLABUS STUDY MATERIAL NOTES MOCK TESTS
CAIIB Bank Financial Management Syllabus 2022 CAIIB BFM Study Material PDF 2022 CAIIB BFM Notes PDF 2022 CAIIB BFM Mock Test PDF 2022

COMPONENTS OF A FUND FLOW STATEMENT

Statement of fund flow consists of two basic elements: 

Sources of funds: It contains a list of sources and the extent of the funds which are availed from those listed sources such as: 

  • Funds from owners 
  • Funds from outsiders 

Application of funds: It contains the list of items or places where the funds are deployed. For example: 

  • Fixed assets 
  • Current assets

Read Also: ONLINE CAIIB COACHING CLASSES 2022, ENROL IN VIDEO COURSE

EXPLANATION OF FUND FLOW STATEMENT WITH EXAMPLES

Suppose, ‘NVM Enterprises’ raises its funds from: Long term funds for its non-current assets.

Explanation: Non-current assets in the company’s long-term investments, these assets do not realize their value in one accounting year. Example: Plant and equipment, intellectual property, investments, and land, etc.

In accounting, it is generally considered a good practice to use the funds raised from long-term sources for long-term purposes or requirements. So, NVM Enterprises using the long-term funds for non-current assets is the right practice and this fact can easily be identified by analyzing the fund flow statement.

What if NVM Enterprises uses its short-term funds to finance its long-term assets?

Now the question is, what if NVM enterprises had been using its short term funds for its long term requirements? 

If we were to use the fund flow statement, it would have conveyed today’s uses of financial information that the funds raised by the enterprise are not being properly utilised because it is very risky to utilise the short-term funds to finance the long-term requirements of assets.

In the above situation, the company will need to repay its short-term obligations otherwise it will be in a cash crunch because it will be in no position to convert the long-term asset put cash at a later stage because of the nature of the investment.

This is how we can use the fund flow statement to analyse different situations and get explanations for the sources of funds and utilisation or application. This statement also allows the users to interpret and understand the impact of fund sources and their utilisation on the business.

SYLLABUS STUDY MATERIAL NOTES MOCK TESTS
CAIIB Advanced Bank Management Syllabus 2022 CAIIB ABM Study Material PDF 2022 CAIIB ABM Notes PDF 2022 CAIIB ABM Mock Test PDF 2022

ADVANTAGES OF PREPARING A FUND FLOW STATEMENT

  • Preparing a fund flow statement helps in providing explanation to the managers of funds the reasons why the company is suffering from liquidity crisis despite the fact that the company is making profits which is usually reflected in the profit and loss statement.
  • It also helps the managers to understand why the companies still stand financially strong in spite of the losses as shown in the profit and loss statement. 
  • This provides a basis to analyse whether or not the short term funds are being used for long term purposes. This way, the fund flow statements highlight the grey areas in the company.

USERS OF FUNDS FLOW STATEMENT

The most common uses of this statement are the persons who lend money for capital purposes

Individuals or entities who pay more attention to fund-flow statements than the balance sheet or profit and loss. 

If we were to take an example, you can think of the banks who lend money to companies or entities in the form of overdraft or cash credit in consideration of interest. The information provided in the statement of profit and loss and balance sheet is used to prepare the fund flow statement and this statement let the banks decide as to whether they should provide the credit facilities to its clients or not.

Fund flow statement format

Fund flow statement format

SOURCES OF FUNDS   APPLICATION OF FUNDS  
Capital

Debts

Funds generated from operations

Sale of assets (if any)

 

 

 

(Bal.fig) Excess usage of funds over sources.

[Decrease in working capital]

XXX

XXX

XXX

 

Funds utilised in creation of Fixed assets

Funds utilised in the creation of other Non-current assets.

Funds utilised in repaying existing loans.

Funds utilised for paying dividends, taxes

 

*(Bal.fig) Excess of Funds over application of funds –

[ Increase in working capital] 

XXX

 

XXX

 

XXX

 

XXX

 

 

XXX

Total xxx   xxx

 

Increase in working capital

If the company has more than the money in its working capital. i.e the funds are lying idle instead of getting utilised. It can work as a free flexible source which the company can utilise to fund its working capital i.e repayment of short term loans or payment of dividends.

SYLLABUS STUDY MATERIAL NOTES MOCK TESTS
CAIIB IT Syllabus 2022 CAIIB IT Study Material PDF 2022 CAIIB IT Notes PDF 2022 CAIIB IT Mock Test PDF 2022

Decrease in working capital

This situation indicates that there are far too many places where the funds needs to be employed for long term purposes but the sources of funds are limited. So in this case, the company will use lean go and make use of the funds available for working capital.

This will result in the company diverting the funds available for working capital purposes for long term use. Therefore, the funds available for working capital are decreased and instead they are utilised for long term purposes.

Also Like:

LEAVE A REPLY

Please enter your comment!
Please enter your name here

🤩 🥳 LS NEW OFFER 🥳 🤩spot_img
🤩 🥳 JAIIB NEW BATCH START 🥳 🤩spot_img

POPULAR POST

RELATED ARTICLES

CAIIB ABM EXAM 2022 | 7 DAYS STRATEGY TO PASS CAIIB 2022 IN ONE ATTEMPT

7 DAYS STRATEGY TO PASS CAIIB ABM EXAM 2022 In this article, candidates preparing for CAIIB ABM Exam 2022 will know what exactly they need...

CREDIT RISK – STANDARDIZED APPROACH & ADVANCED APPROACH

CREDIT RISK - STANDARDIZED APPROACH & CREDIT RISK - ADVANCED APPROACH In this article, we are going to discuss the standardized and advanced approach to...

INCREMENTS TO BANKERS ON QUALIFYING JAIIB EXAM 2022

JAIIB INCREMENT ON QUALIFYING JAIIB EXAM You will read the amount of Increments to Bankers when they qualify for JAIIB Exam 2022 or the upcoming...

STRATEGY FORMULATION AND IMPLEMENTATION | BUILDING AN HR STRATEGY | FREE NOTES ON CAIIB

FREE CAIIB NOTES ON BUILDING AN HR STRATEGY- STRATEGY FORMULATION AND IMPLEMENTATION In today's article, you will learn about Strategy Formulation and Implementation from the...