Sources and Applications (Uses) of Funds Statement

Definition

The “Sources and Applications (Uses) of Funds Statement” is a financial document that provides a comprehensive overview of a firm’s financial activities over an accounting period. It highlights how funds were generated (sources) and how they were utilized (applications) in the business. This statement is essential for understanding the changes in a company’s financial position and is a key tool for financial analysis.

Parts of the Statement

1. Sources of Funds

   • Summarizes transactions that led to an increase in working capital. Common sources of funds include:
     • Net income
     • Depreciation
     • Issuance of bonds
     • Sale of stock
     • Increase in deferred taxes

2. Applications of Funds

   • Summarizes how the obtained funds were used. Common applications of funds include:
     • Purchase or improvement of plant and equipment
     • Payment of dividends
     • Repayment of long-term debt
     • Redemption or repurchase of shares
     • Payment of taxes

Examples

Example 1: Net Income

• Source: Net income from operations is often a primary source of funds, as it indicates profit that can increase working capital.

Example 2: Issuance of Bonds

• Source: When a company issues bonds, it raises capital through debt, providing immediate funds to be used.

Example 3: Purchase of Equipment

• Application: Funds might be used to purchase new machinery or upgrade an existing plant, investing in future production capacity.

Example 4: Repayment of Long-term Debt

• Application: Using funds to pay off loans reduces debt but also decreases available working capital in the short term.

Frequently Asked Questions (FAQs)

What is the primary purpose of the Sources and Applications of Funds Statement?

The primary purpose is to provide insight into how a company generates and utilizes funds, helping stakeholders understand the financial health and operational efficiency of the business.

How does this statement differ from a cash flow statement?

While both statements track financial movements, the sources and uses of funds statement specifically focuses on changes in working capital, whereas the cash flow statement encompasses all cash transactions.

Why is depreciation considered a source of funds?

Depreciation is a non-cash charge that reduces taxable income, effectively preserving cash which can be used elsewhere in the business, hence considered a source of funds.

How often is this statement prepared?

Typically, this statement is prepared at the end of each accounting period, which can be quarterly or annually.

Can this statement be used to assess a company’s liquidity?

Yes, by analyzing the sources and uses of funds, one can infer the company’s ability to generate cash and meet short-term obligations, thus assessing liquidity.

Related Terms

• Working Capital: The difference between a company’s current assets and current liabilities, indicating operational liquidity.
• Deferred Taxes: Taxes owed but not yet paid, recorded as a liability on the balance sheet.
• Net Income: The total revenue minus total expenses, indicating profitability.

Online References

1. Investopedia – Funds From Operations (FFO)
2. Accounting Tools – Sources and Uses Statement

Suggested Books for Further Studies

1. “Financial Statement Analysis and Security Valuation” by Stephen Penman
2. “Principles of Corporate Finance” by Richard A. Brealey, Stewart C. Myers, and Franklin Allen
3. “Financial Reporting, Financial Statement Analysis, and Valuation” by James M. Wahlen, Stephen P. Baginski, and Mark T. Bradshaw

Fundamentals of Sources and Applications of Funds Statement: Accounting Basics Quiz

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