The Sources and Applications (Uses) of Funds Statement provides a systematic analysis of the changes in the financial position of a firm from one accounting period to another. Also known simply as the sources and uses of funds statement, it serves as a critical tool in financial analysis, highlighting the flows of funds into and out of a business.
Sections of the Statement
Sources of Funds
The sources of funds section outlines the transactions that increased the firm’s working capital. Common sources include:
- Net Income: The profit retained from the firm’s operations after all expenses have been deducted.
- Depreciation: The non-cash expense reflecting the reduction in value of fixed assets.
- Issue of Bonds: The funds raised by issuing debt securities.
- Sale of Stock: The cash inflow from issuing new equity shares.
- Increase in Deferred Taxes: The temporary timing differences creating a deferred tax liability, effectively acting as a source of cash.
Applications (Uses) of Funds
The applications of funds section reviews how the funds have been utilized within the firm. Common applications include:
- Purchase or Improvement of Plant and Equipment: Capital expenditures on tangible assets for business operations.
- Payment of Dividends: The distribution of earnings to shareholders.
- Repayment of Long-term Debt: The reduction of existing obligations.
- Redemption or Repurchase of Shares: The acquisition of the company’s own shares.
- Payment of Taxes: The settlement of tax obligations to government authorities.
Detailed Breakdown
Net Income
Net income, represented as \( NI \), is calculated as follows:
Depreciation
Depreciation is a non-cash charge and part of the operating expenses, used to allocate the cost of tangible assets over their useful lives:
Issue of Bonds & Sale of Stock
These are capital-raising activities, crucial for expansion and funding operations, affecting equity and debt on the balance sheet.
Purchase or Improvement of Plant and Equipment
These are substantial investments aimed at expanding operational capacity or efficiency. They are capital expenditures and reflect on the asset side of the balance sheet.
Repayment of Long-Term Debt & Redemption/Repurchase of Shares
These transactions reduce existing financial obligations and equity, respectively, indicating a focus on managing balance sheet leverage.
Special Considerations
- Timing Discrepancies: Differences may arise due to the timing of recording and actual cash flows.
- Non-Cash Transactions: Certain items like depreciation don’t affect cash directly but are part of fund movements.
Examples
- Example 1: A firm issuing $1 million in new stock and using these funds to purchase new machinery.
- Example 2: A business experiencing a net income of $500,000 and repaying $200,000 of its long-term debt from these profits.
Historical Context
Historically, the funds statement has evolved to offer clarity on liquidity and fund management, replacing earlier, more simplistic views of cash flow and financial health.
Applicability
This statement is applicable in various business contexts, from small startups analyzing growth to large corporations managing complex financial strategies.
Comparisons
- Funds Statement vs. Cash Flow Statement: While both provide insights into fund flows, the cash flow statement focuses on actual cash movements, whereas the funds statement can include non-cash items.
Related Terms
- Working Capital: Current assets minus current liabilities.
- Deferred Taxes: Taxes that are accrued but not yet paid, creating temporary differences between accounting and taxable income.
- Capital Expenditure (CapEx): Funds used by a company to acquire, upgrade, or maintain physical assets.
FAQs
How does depreciation affect the sources and applications of funds statement?
Is the sources and applications of funds statement mandatory for all companies?
References
- Investopedia. “Source and Use of Funds Statement.” Link
- AccountingCoach. “Explanation of Sources and Uses of Funds.” Link
Summary
The Sources and Applications (Uses) of Funds Statement is a vital analysis tool for understanding a firm’s financial activities over an accounting period. By detailing sources and uses of funds, it aids stakeholders in grasping how a company manages its internal and external financing and allocates resources for operational and strategic purposes. This statement, therefore, plays a fundamental role in financial planning and assessment.
