Source and Application of Funds

A Basic Guide



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.

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