UNIT 9. FUND STATEMENTS

We need to refer to the financial statements for Tourism Development Corporation included in the previous topic.

The first step in preparing a funds statement is to look at the balance sheets for 1987 and 1988 and subtract one figure from the other.

Starting at the top of the balance sheet the results would be as follows:

Accounts Receivable - $ 50,000

Cash - 2,000

Investments - 25,000

Inventories - 55,000

Plant & Equipment (at cost) + 190,000

Provision for Depreciation + 100,000

Accounts Payable - 27,000

Notes Payable - 10,000

Provision for Tax - 5,000

First Mortgage - 20,000

Retained Earnings + 20,000

The next step is to classify each of these figures as a "source" or "use". To do this we must follow the following rules.

An increase in an asset         Use

A decrease in an asset         Source

An increase in a liability      Source

A decrease in a liability         Use

Now I suggest you go back to each of these figures that has a minus or a plus sign in front of it and label it with an

'S' or a 'U' in accordance with these rules.

From this information we can now prepare a funds statement.

Funds Statement for Year Ending 30.6.88

Sources of Funds

Net Profit for Year (after tax & dividend)                 20,000

add back Depreciation                                              100,000

Funds from Operations (Operating Cash Flow)     120,000

Accounts Receivable                                                  50,000

Cash                                                                                 2,000

Investments in Shares - short term                             25,000

Inventories                                                                     55,000

                                                                                        252,000

Uses of Funds

Plant & Equipment                                                     190,000

Accounts Payable                                                        27,000

Notes Payable                                                             10,000

Provision for Taxation                                                 5,000

First Mortgage                                                             20,000

                                                                                    252,000

You can then see how all the items marked 'S' have been listed under the heading Source of Funds in the Funds Statement and all the items marked 'U' have been listed under the heading Use of Funds.

The trickiest aspect is to add back depreciation. The reason we do this is that depreciation is only a book entry and no funds are involved with a depreciation journal entry. The only impact on funds for fixed assets occurs at the time of the original investment when it would be shown as a use being an increase in an asset.

In the Funds Statement above the $120,000 is referred to as "Operating Cash Flow" because it represents the net profit from operations before depreciation was deducted.

From an accounting point of view there are alternative ways of preparing funds statements once you introduce complications for taxes and dividends but we have simplified the approach for you and suggest you follow this approach in your exercises.

Try now to get a feel for the significance of what we are doing. In a very simple way we have described where the organisation has raised its funds and how it has invested them.

Copyright © Bill Wright 1994