Report on the movement of funds, Funds from core business, Other...

Fund movement report

The third most important financial document is a report on the flow of funds, or a report on the sources and use of funds. This document shows the movement of funds into the accounts of the company's current assets from external sources, such as shareholders, creditors and consumers. He also shows the movement of funds for payment of the firm's obligations, the repurchase of shares or the payment of dividends. These movements are usually shown over the same period as the period covered by the income statement.

In Fig. 2.1 shows the inflows of funds into the pool of working capital, consisting of current accounts of the firm, and outflows from it. In this sense, the working capital pool ( working-capital pool ) is a measure of net working capital. Only transactions involving non-current accounts, can be considered the source or use of funds. This rule contains the main meaning of the report on the movement of funds. Its economic meaning is to reflect changes in the strategic state of the firm's finances in isolation from everyday fuss.

Sources and use of funds and a pool of working capital

Fig. 2.1. Sources and use of funds and a pool of working capital

Example

The firm sells a six-month bond and uses the money received to increase the stock of materials.

1. Will this transaction affect the size of the pool of working capital?

2. Will it be shown in the Funds Flow Statement? Responses.

1. No,

2. No,

Funds from main activity

In the long term, the main activity of the company is the main source of its funds. To calculate these revenues, two methods are used:

1) Net income + Non-cash expenses. Funds from the main activity can be estimated by adding to the net income after taxes the amount of non-cash expenses (mainly depreciation of equipment);

2) Sales - Cash costs. To obtain this estimate, general operating expenses, interest payments and taxes are subtracted from the sales amount.

Other sources of funds

For the majority of firms, three more sources of funds are important:

- Sale of shares;

- Long-term borrowing;

- Sale of fixed assets.

Use of funds:

- Purchase of fixed assets (machine tools, buildings, structures, land, etc.);

- Payment of obligations and redemption of their securities;

- Payment of dividends on its shares;

Reimbursement of losses and damages.

Below are three report formats that measure the flow of funds.

1. Measuring changes in the net working capital (Table 2.3). The format contains three main groups: sources, use and change of working capital.

Table 2.3

Example of a format. Measuring changes

Sources:

Net Income

50000

Depreciation

30000

funds from operations

80000

sale of bonds

60000

sale of equipment

40000

Total sources

180,000

Usage:

dividends

30000

bond redemption

65000

Net working capital growth

85000

2. Balancing of sources and use. In this format, any change in operating capital is either a source of funds or their use. The sum of the sources is the sum of the uses. Sources are the reduction of current assets and increase in current liabilities. Use is an increase in current assets and a reduction in current liabilities. This format is not so useful for the financial manager and analyst, he even somewhat disorients them. The point is that from the accounting point of view, sources and uses can be considered balanced, but from the financial point of view this is not always the case. For example, an increase in cash is not the use of funds, but only a transfer to a more liquid form in preparation for quick payments. Changes in net working capital reflect liquidity, and balancing makes it much less obvious (Table 2.4).

Table 2.4

Example of a format. Balancing Sources and Uses

Sources:

Net Income

50000

Depreciation

30000

funds from operations

80000

sale of bonds

60000

sale of equipment

40000

decrease in accounts receivable

15000

salary increase

10000

Total sources

205000

Usage:

dividends

30000

bond redemption

65000

declining bills for payment

50000

growth of cash accounts

60000

Net working capital growth

205000

3. Measuring changes in cash. In this format, three categories are used: sources, uses and changes in the balance of cash. In this case, current accounts are considered part of the company's corporate profile, and cash is excluded. This format is sometimes called a report of cash flows (each-flow statement) and is used to focus on the most liquid asset - cash accounts (Table 2.5).

Table 2.5

Example of a format. Measuring changes in cash

Sources:

Net Income

50000

Depreciation

30000

funds from operations

80000

sale of bonds

60000

sale of equipment

40000

declining bills for payment

10000

growth of cash accounts

15000

Total sources

205000

Usage:

dividends

30000

bond redemption

65000

declining bills for payment

50000

Total usage

145000

Net working capital growth

60000

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