Sources and Uses of Funds Statement
“It
is a summary of a firm’s changes in financial position from one period to
another”. It is also called flow of funds statement or a statement of
changes in financial position.
Sources and Uses of Funds Statement
Funds
The term flow means movement and includes both
inflows and outflows of resources. It includes all of the firm’s investments
and claims (against those investment) allow us to capture all of transections
as both sources and uses of funds.
Sources
Where the money for all funding is going to come from or The
money needed for various purposes for business startup.
Steps
in Creating a Sources and Uses of Funds Statement
We prepare a basic, bare-bones funds statement
1: determining the amount and direction of net balance sheet
changes _an increase (+) or decrease(-) that occur between two balance sheet
dates.
2: classifying net balance sheet changes as either sources or
uses of funds ass follow
Sources of
Funds
·
Increase (+) in a Claims
Item (i.e., liability or shareholder’s equity item)
·
Decrease(-) in an Asset Item
Uses of
funds
·
increase (+) in an Asset
Item
·
Decrease(-) in a Claims Item
(i.e., liability or shareholder’s equity item)
3: consolidating this information in a source and uses of
funds statement format
For
example
Comparative balance sheet with sources and uses of funds {1.a:
self_correction problem}
Thousand $
|
Asset |
Year 1 |
Year 2 |
Direction of change |
source |
Use |
|
|
|
|
|
|
|
|
Cash |
53,000 |
31,000 |
- |
22,000 |
|
|
Marketable
securities |
87,000 |
0 |
- |
87,000 |
|
|
Account
receivable |
346,000 |
528,000 |
+ |
|
182,000 |
|
Inventories |
432,000 |
683,000 |
+ |
|
251,000 |
|
Current assets |
918,000 |
1,242,000 |
|
|
|
|
Net fixed
assets |
1,113,000 |
1,398,000 |
+ |
|
285,000 |
|
Total |
2,031,000 |
2,640,000 |
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable |
413,000 |
627,000 |
+ |
214,000 |
|
|
Accrued
expenses |
226,000 |
314,000 |
+ |
88,000 |
|
|
Bank
borrowings |
100,000 |
235,000 |
+ |
135,000 |
|
|
Current liability |
739,000 |
1,176,000 |
|
|
|
|
Common stock |
100,000 |
100,000 |
|
|
|
|
Retain
earnings |
1,192,000 |
1,364,000 |
+ |
172,000 |
|
|
|
|
|
|
|
|
|
Total |
2,031,000 |
2,640,000 |
|
718,000 |
718,000 |
Adjustment
A few minor
adjustments will provide us with an even more useful statement with which to work. For adjusting
change in retain earnings and that in net fix assets. We need to
Recognize
the profit and earning
where, net profit as a source of funds and cash dividends as
a use of funds. Giving individual recognition to profit (or loss) and dividends
paid provides important added funds detail with a minimum effort.
Recognize the depreciation and gross change
in fix assets
What we really want to know
is something called funds provided by operations_ something
usually not expressed directly on income statement.
Besides helping us derive funds provided by operations adding
back depreciation as a some of funds
allow us to explain the gross addition (or reduction) to fixed as opposed to
merely the change in net fixed assets.
For
example
As for the above example the depreciation for 2020 was
189,000 then,
Thousand $
|
Source |
|
Uses |
|
|
|
|
|
|
|
Funds
provided by operations |
|
Addition
to fix assets |
|
|
Net profit (retained
earnings) |
172,000 |
Fix assets |
285,000 |
|
Depreciation |
189,000 |
Depreciation |
189,000 |
|
|
361,000 |
|
474,000 |
|
Decrease ,
marketable securities |
87,000 |
Increase ,
account receivable |
182,000 |
|
Increase , account payable |
214,000 |
Increase ,
inventories |
251,000 |
|
Increase , accrued expenses |
88,000 |
|
|
|
Increase , bank borrowings |
35,000 |
|
|
|
Decrease ,
cash |
22,000 |
|
|
|
|
907,000 |
|
907,000 |
Analyzing the sources and uses of funds statements
The analysis of funds statements give us insight into the
financial operations of a firms. An analysis of major sources of funds in
the past reveals what portion of firm’s
growth were financed internally and
externally.
Funds statement are also very useful in judging whether the
firm expanded at too fast a rate and whether, the firm’s financing capability
is stained etc.
For
example
From the above information we can analyze that
The company has had substantial capital expenditures and increases in current assets. This growth has far outstripped the growth in retained earnings. To finance this growth, the company has reduced its marketable securities to zero, has leaned heavily on trade credit (accounts payable), and has increased its accrued expenses and bank borrowings. All of this is short-term financing of mostly long-term buildups in assets.
