Sources And Application Of Funds

Sources And Application Of Funds: the following are the main sources of funds:

(i)      Funds From Operations: the operations of the business generate revenue and entail expenses. Revenues augment working capital and expenses other than depreciation and other amortizations. The following adjustments will be required in the figures of net profit for finding out the real funds from operations:

*           these items are added as they do not result in outflow of funds. In case of `net loss’ for the year these items will be deducted.

(ii)      Issue Of Share Capital: an issue of share capital results in an inflow of funds.

(iii)    Long-Term Borrowings: when a long-term loan is taken, there is an increase in working capital because of cash inflow. A short term loan, however, does not increase the working capital because a short-term loan increases the current assets (cash) and the current liability (short term loan) by the same amount, leaving the size of working capital unchanged.

(iv)     Sale Of Non-Current Assets: when a fixed asset or a long-term investment or any other non-current asset is sold, there will be inflow represented by cash or short-term receivables.

(b) Uses Of Funds: the following are the main uses of funds: 

(i)        Payment Of Dividend: the transaction results in decrease in working capital owing to outflow of cash. 

(ii)      Repayment Of Long-Term Liability: 

The repayment of long-term loan involves cash outflow and hence it is used for working capital. The repayment of a current liability does not affect the amount of working capital because it entails an equal reduction in current liabilities and current assets.

(iii) Purchase Of Non-Current Assets: 

when a firm purchases fixed assets or other non-current assets, and if it pays cash or incurs a short-term debt, its working capital decreases. Hence it is a use of funds.