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Source & Application: What it tells you
The Source and Application of Funds Statement tells exactly where the company got their money from and how it was spent. It tells whether management has made sound investment decisions. This statement is made up by listing the changes that have occurred in all of the Balance Sheet Items between any two Balance Sheet dates. The statement consists of two sections:
The Application (where the money has gone) This arises either from: A decrease in Liabilities OR An increase in Assets Application of Funds originate from: Losses to be met by the company The purchase of fixed assets The full or partial payment of loans The granting of loans Liability for taxes Dividends paid and proposed Any increase in net Working Capital |
Source & Application: Who uses it
The information supplied in the Source and Applications of Funds Statement is useful to:
They use the Source and Applications of Funds statement to pick up healthy, or unhealthy trends regarding the company's trading activities. |
Source & Application: Glossary of Terms
Source of Funds Net Income (After taxation) Net Income is the main source of funds for a company. Add: Items not affecting the flow of funds - Depreciation (Non cash items) The Net Income figure needs to be adjusted, to arrive at the true figure for funds, generated by the company. Depreciation is shown as an expense in the Income Statement. It is only a book entry and does not really require the physical outlay of cash, unlike some of the other expenses. As the Funds Statement is only concerned with the actual movement of funds, we need to add back the depreciation expense. Funds originated from operations This reflects the actual income originated from the company's operations. Application of Funds Acquisition of : Fixed and other assets Specifies the amounts paid for assets purchased Increase in Net Working Capital (Net Current Assets) Specifies the actual increase of Working Capital during the financial year. |
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