Question

Consider the following statements.
1. Operational loss is a source of funds
2. Decrease in working capital is a source of funds
3. Addition to fixed assets are an application of funds
4. Fresh introduction of capital is an application of funds
Which of the above statements are applicable while preparing the funds flow statement?

• A. 1 and 2
• B. 1 and 3
• C. 1 and 4
• D. 2, 3 and 4

Answer 1

Answer: (D)

2, 3 and 4

Fund flow statement is a statement that shows the inflow and outflow of cash in the business :

1) Operational loss is not a source of fund hence this statement is incorrect. Operational loss is when operating expenses exceed operating income.

2) Decrease in working capital is a source of fund as the more the working capital the more funds are blocked hence when working capital is reduced the funds are released. Hence, Decrease in working capital is source of funds.

3)Addition to fixed assets is application of funds as cash is being used to purchase fixed assets.

4) Fresh introduction of capital is sources of funds as cash is coming in the business.