When total source of funds is more than total applications of funds the net effect is?
Answers
Definition
The Source and Application of Funds Statement shows the total sources of new funds raised between Balance Sheet dates and the total uses of those funds in the same period.
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 Source (where the money has come from)
§ This arises either from : An increase in Liabilities OR
§ A decrease in Assets
§ Source of Funds originate from:
§ Net Income after Tax
§ Disposal or revaluation of fixed assets
§ The proceeds of loans raised
§ The proceeds of shares that were issued
§ Repayments received on loans previously granted by the company
§ Any decrease in net working capital
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:
§ Users within the business (internal)
§ Directors of Companies
§ Members of Closed Corporations
§ Partners of Partnerships
§ Owners / Sole Proprietors
§ Users outside the business (external)
§ Shareholders
§ Banks
§ Receiver of Revenue
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.
Explanation:
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