Statements of source and application of funds

Although cash flow statements have now superseded statements of source and application of funds, funds flow statements may not disappear entirely. Some businesses or industries will continue to find fund flow statements useful and informative. For this reason, it is necessary to examine funds flow statements.

Funds statement on a cash basis

Funds statements on a cash basis can be prepared by classifying and/or consolidating:

a) net balance sheet changes that occur between two points in time into changes that increase cash and changes that decrease cash

b) from the Income statement and the surplus (profit and loss) statement, the factors that increase cash and the factors that decrease cash and

c) this information in a sources and uses of funds statement form.

Step (a) involves comparing two relevant Balance sheets side by side and then computing the changes in the various accounts.

Sources of funds that increase cash

Sources of funds which increase cash are as follows:

· a net decrease in any asset other than cash or fixed assets
· a gross decrease in fixed assets
· a net increase in any liability
· proceeds from the sale of preferred or common stock
· funds provided by operations (which usually are not expressed directly in the income statement).

To determine funds provided by operations, we have to add back depreciation to net income after taxes. In other words, suppose we have:

Net income after taxes of a company, being	= $750,000
and depreciation (non-cash expense), being	= $100,500
	850,500

Then, the funds provided by operations of such a company will be obtained by adding the values of the two above items, i.e. $850,500. Thus, the net income of a company usually understates the value of funds provided by operations by the value of the depreciation - in this case by $100,500.

But then, depreciation is not a source of funds, since funds are generated only from operations. Thus, if a company sustains an operating loss before depreciation, funds are not provided regardless of the magnitude of the depreciation charges.

Application of funds of a company usually include:

· a net increase in any asset other than cash or fixed assets
· a gross increase in fixed assets
· a net decrease in any liability
· a retirement or purchase of stock and
· the payment of cash dividends.

To avoid double counting, we usually compute gross changes in fixed assets by adding depreciation for the period to net fixed assets at the ending financial statement date and subtract from the resulting amount the net fixed assets at the beginning financial statement date. The residual represents the gross change in fixed assets for the period. If the residual is positive, it represents a use of funds; if it is negative, it represents a source of funds.

Once all sources and applications of funds are computed, they may be arranged in statement form so that we can analyse them better.

Now attempt exercises 3.2 and 3.3

Exercise 3.2 Source and application of funds I

Given below are some different sources and applications of funds finance items purposely scattered for an Agribusiness Company K for the year ended 31 December 19X8.

1) Identify them as sources and applications of funds, and arrange them in a proper manner with the Sources of funds on the left and the Applications on the right of a tabulated statement for the said period.

2) Comment briefly on some of the uses of the tabulated statement.

	$
Increase in cash position =	12,000
Decrease in debtors =	8,000
Increase in long term debt =	2,500
Increase in stocks =	26,500
Increase in tax prepayments =	2,000
Net profit =	35,000
Increase in other accruals =	3,000
Additions to fixed assets =	4,500
Cash dividends =	15,000
Increase in bank loans =	20,000
Increase in prepaid expenses =	2,500
Increase in investments =	9,000
Increase in creditors =	5,000
Decrease in accrued taxes =	8,000
Depreciation =	6,000

Note: The above figures are based on the balance sheet and income statement of Company K, which are not shown in this exercise.

Exercise 3.3 Sources and applications of funds II

Using the data and information in the annual reports (especially the balance sheet and income statements) of Cerial Marketing Board provided for 1993 and 1992:

a) compute and identify the sources and applications of funds of the parastatal for the years 1992 and 1993 and

b) arrange them into a sources and applications of funds statement for 1993.