Steps in Preparation of Fund Flow Statement Homework Answers
The financial position of a company can never be the same throughout; it keeps changing. The balance sheet is mainly the object used to determine the financial state of a firm. The statement that compares two balance sheets of a company, thus analyzing the reasons for which the financial condition of a company went through change is called the fund flow statement.
It shows both inward and outward movement of funds for a specific period. Students can easily get online help on the topic by searching for links like steps in preparation of fund flow statement homework answers.
Difference between Fund flow and cash flow statement
Cash flow is that statement which shows the flow of cash; this is a report accepted accounting principles. On the other hand, fund flow statement shows the inward and outward movement of actual cash.
Facts about the fund flow statement
The following facts should be kept in mind while preparing the fund flow statement. Details on these facts can be obtained by searching for topics like steps in preparation of fund flow statement homework answers online.
- Current asset and working capital are directly proportional to each other. Any increment in current asset will in turn cause increment in working capital. Similarly,decrease in current asset will mean that there will be decrease in working capital.
- Current liability is inversely proportional to working capital. Increase in current liability will cause decrease in working capital and decrease in current liability will result in increase in working capital.
- Increase in both current asset and current liability will have no affect on working capital.
- Decrease in both current asset and current liability will have no affect on working capital.
- Any change in fixed assets, i.e. non-current assets and fixed liabilities, i.e. non-current liabilities affects whatever is taken to be working capital.
What is current asset?
Cash or any form of company asset that will turn into cash within the companyâ€™s operating period is called current asset.
What is current liability?
The debts or obligations of a company that is due within the companyâ€™s operating period are the current liabilities of the company. In general, companies use cash or current assets to pay their current liabilities.
What is fixed asset?
The tangible assets like plant, property, building, equipment, etc. that are purchased to be used for long period and cannot be converted to cash easily are fixed assets of a firm.
What is fixed liability?
The form of bonds, debts, mortgages or any obligations that have a due date exceeding the companyâ€™s operating period is termed as fixed liabilities.
What is working capital?
Every company requires capital for operation. Working capital amount is that money which is used for daily trading operations is called. Working capital of a firm is calculated by subtracting current liabilities from current assets. The formula for working capital is,
WORKING CAPITAL = CURRENT ASSETS â€“ CURRENT LIABILITIES.
More examples of these terms can be obtained from online portals by searching topics like steps in preparation of fund flow statement homework answers. A proper knowledge of these terms is necessary to prepare the fund flow statement.
Importance of fund flow statement
A fund flow statement is a crucial tool of finance that analyzes the financial condition of any firm. It projects the source and application of funds of a company. The information on the companyâ€™s operational, financial and investment activities can be obtained from the fund flow statement. The significance of the preparation of the fund flow statement is as follows –
- It identifies the changes in parameters like current liabilities financing and current asset investments.
- The companyâ€™s capability of paying interest, dividend, and debts when they become due can be analyzed by the statement.
- The relation between net income and funds from operation gets prominent.
- The factors that are responsible for changes in liabilities and assets by comparing two balance sheets can be obtained.
- The companyâ€™s ability to get long-term financing to cope with the investment in long-term assets is determined by the statement.
- The knowledge of past fund flow can help to predict the future flow.
Thus the fund flow statement is an integral part of accounting. All kinds of business need to be accounted in terms of fund flow to get complete knowledge of its financial condition and bring required changes to optimize the efficiency of the firm. Online search on topics like steps in preparation of fund flow statement homework answers can help students to practice the subject with more real life examples.
Steps to prepare the fund flow statement
The different steps involved in preparation of the fund flow statement are as follows â€“
- Preparation of a proper statement.
- Preparing the account with profit and loss adjustments.
- Analyzing the statement after adjustments are made.
- Preparation of a separate ledger.
- Maintaining the taxation provision.
- The fund flow statement
The statement is divided into three parts â€“
- Fund sources
Examples of fund sources can be â€“
- Deposit acceptance.
- Issuance of shares.
- Loan taken.
- Issuance of debentures.
- Sale of long-term investments.
- Fund for operational activities.
- Sale of fixed assets.
- Decrease in working capital.
- Fund application
Examples of fund applications could include â€“
- Payment of income tax.
- Preference shares.
- Redeemable redemption.
- Loan repayment.
- Debentures redemption.
- Fixed asset purchase.
- Payment of dividend.
- Long term investment purchase.
- Deposit repayment.
- Loss of fund due to operations.
- Increment in working capital.
The amount for fund sources and applications need to be calculated for getting the fund flow statement. Examples for practice can be obtained by searching links like steps in preparation of fund flow statement homework answers online.
- The statement of working capital
This statement is used for calculating the increment or decrease in working capital. Working capital will be calculated by subtracting the total current liabilities from the total current assets.
- Preparation of account statement with profit and loss adjustments
The statement is made after calculating the profits and losses. This can be done by either statement or accounting method. The accounting method is considered to be more accurate.
- Analysis after adjustments
The adjustments can be found in two areas. The left-hand side of the column generally shows the applications part in adjustment section whereas the right-hand side shows the debited part of the treatment section.
- Preparation of separate ledger
In case the information is in relation to adjustment of assets or liabilities, preparing a separate ledger is important. The balances from this separate ledger can be easily transferred to the fund flow statement.
- Handling the taxation provision
Many times while taxation provision is being processed, the information can be found on the adjustment. Thus this provision is treated as a non-current liability.
These are the basic steps for preparing fund flow statement, to bring more clarity students can practice by searching topics like steps in preparation of fund flow statement homework answers online.