Introduction:
The statement of sources and uses of funds is a statement that condenses the financial statements and financial plan in one statement.
It displays the sources from which an organization or a company manages to generate cash and all the areas where the obtained cash is used during an accounting period.
This statement also shows a business’s cash inflow and outflow over an accounting period, usually a year or a month.
Statement of source and use of the fund is normally prepared or use by the non-profit organization rather than the profit organization. This statement is almost the same as the income statement; however, it is used mostly for non-profit organizations.
Like other financial statements, it is generated annually but can be drawn up whenever necessary. It also gives us information about the changes that have occurred in the cash and cash equivalents of a business.
Large companies and businesses use the sources and uses of funds statements in their annual report to show the creditors how much collateral is there, and what will be their contributions.
Creating this statement is also how much businesses strategize their future financial plans.
It is noteworthy that the statement of sources and uses of funds outlines the cash flow over a period of time, unlike the balance sheet that provides us with an overview of how the assets and liabilities look at a particular date.
The statement of sources and use of funds shows us the total sources available of new funds that have been generated between the balance sheet dates, along with how those funds have been put to use.
It also has a list of all the changes that have happened in all the Balance Sheet items between any two balance sheet dates.
The statement of sources and uses of funds tells us the exact way a company has generated cash or money from, and how those funds have been spent, which is really helpful when it comes to figuring out if certain investment decisions were reasonable.
What the statement of sources and uses of funds tells us?
The statement of sources and uses of funds tells us exactly where a company has generated its money from and how it was spent or put to use.
The cash inflows into the company or the cash received, and the cash outflows from the company, or the cash spent, are shown in this statement.
The statement of sources and uses of funds also shows us how changes in balance sheet items can affect the cash available to a business.
The projections in the statement can help businesses do short-term planning, especially when it comes to decisions involving funds available.
The company’s management or current and potential investors both can look at the sources and uses of funds statements to distinguish between the healthy and problematic trends in a company’s transactions. It is also used to provide us with a great overview of how much funding can be required for a project.
What is included in the statement of sources and uses of funds?
Basically, the statement consists of two sections: the source (where the money has been generated from) and the application (what the money has been spent on).
The examples of sources where funds can originate from can be:
- A decrease in liabilities or an increase in assets
- Net income after tax
- The disposal or revaluation of fixed assets
- Proceeds of loans taken
- Proceeds of common stock issued
- Repayments received on loans previously granted by the company
- Any increase in net working capital
Examples of where the money is spent includes:
- Losses to be met by the company
- The purchase of fixed assets/investments
- The full or partial payment of loans
- Granting of loans
- Liability for taxes
- Dividends paid or proposed
- Any decrease in net working capital
Statement of use and sources of fund
This is an example of what the statement of sources and uses of funds can look like. One important requirement of the sources and uses statement is that the total sources of funds must match the total uses of funds.
This is because if a company is generating money, it must also be going somewhere and being put to use. If more cash is being spent, than being generated, the company would require more capital in order to be efficient and work at full capacity or potential.
On the other hand, if a company has more sources from where cash is being generated, and not much is being spent, then there is cash available to be invested or distributed to shareholders.
The difference between the total of the uses of funds and the total funds you’ve spent must be equal to the amount of financing needed.
Conclusion:
In this article, we talked about the sources and uses statements that companies issue along with their annual reports. The sources and uses statement displays where a company is making money from and how it is spending those funds generated.
