Companies manage finance from various sources. This finance comes from equity, debt, or other hybrid instruments. Essentially, these constitute the capital structure of a company. This structure varies from one company to another. Usually, companies operating within the same industry share similar features in their capital structure. However, other factors also influence the equity and debt finance companies’ mix.
Companies use financial statements to report their activities. These include the balance sheet, income statement, and cash flow statement. Primarily, companies must report activities through these statements under accounting standards. Each of these covers a specific area of a company’s finance. Investors can use these statements to analyze a company’s finance and operations over a period.
Preparing and reporting financial statements is mandatory under accounting standards. For public companies, specifically, these are compulsory under several rules and regulations. However, most public companies do not limit the information they provide to their stakeholders to these statements only. Some companies may also go beyond these requirements and offer more financial statements to report their activities.
One of these includes the statement of source and use of funds. This statement is not mandatory under any rules and regulations. Nonetheless, companies may still contain it as a part of their annual report. For stakeholders, it is crucial to know what it is.
What is the Statement of Source and Use of Fund?
The statement of source and use of funds is a report that includes various elements of financial reporting. On top of that, it also involves aspects of financial plans. Essentially, this statement summarizes the changes in financial position from one period to another. The statement of source and use of funds was an element of financial reporting in the US. However, accounting standards have replaced it with the cash flow statement.
The statement of source and use of fund includes what the name suggests. It consists of the sources where a company acquires its finances. Essentially, it shows the areas where a company generates cash inflows. On the other hand, it also reports the cash outflows during a specific period. The source and use of funds statement include similar information as the cash flow statement. However, it uses a different format.
The statement of source and use of funds has become less common due to its unpopularity. However, some entities still use it to report their operations. One of these includes nonprofit organizations. This statement allows them to illustrate their fund movements better than the traditional financial statements. For those entities, the statement of source and use of funds is similar to the income statement.
Companies and other entities prepare the statement of source and use of funds after specific periods. These periods are similar to the intervals they use for other financial statements. However, it does not appear as a part of the package with those statements. Instead, companies may offer it as a standalone report or analysis of their operations. On top of that, they may also be a part of the annual report companies prepare.
The statement of source and use of funds is prevalent in some areas. These usually include public companies and nonprofit organizations. Usually, it uses the information required for the cash flow statement. Therefore, companies can prepare this statement with the latter without any additional effort. Unlike the statement of cash flows, the statement of source and use of funds does not segregate funds into various categories.
How to prepare the Statement of Source and Use of Fund?
As the name suggests, the statement of source and use of funds has two sections. The first involves the origin of the funds generated by a company. Usually, these include areas where a company gets its cash inflows and makes money. On the other hand, it also involves the use of funds section. It is where the company gets its cash outflows from or spends money.
Preparing the statement of source and use of funds is straightforward. As stated above, it uses the same information provided by the cash flow statement. However, it presents that information in a different format. The first part of creating this statement is the sources section. Under this section, companies must include the list of all funds it has generated during a period.
Typically, companies generate funds from equity or debt finance. On top of that, this section may also report income from savings accounts or other similar sources. However, it may vary from one company to another. Unlike the cash flow statement, the statement of source and use of funds does not segregate those sources into different headings.
The other section in the statement of source and use of funds reports on how companies utilize their finance. This section usually includes more items than the first one. Firstly, it must contain costs from using facilities, equipment, and other fixed assets. On top of that, it must also report an estimate of a company’s working capital needs.
The statement of source and use of funds reports the difference between those sections. This difference also considers the total collateral provided. This amount must equal the financing needs of the company. Practically, companies may use several formats to prepare the statement of source and use of funds. Since accounting standards don’t dictate that format, companies can report it in many ways.
What does the Statement of Source and Use of Fund include?
The statement of source and use of funds includes various areas. As stated above, this statement involves reporting two sections, sources and use of funds. Based on the section under consideration, the elements of this statement may differ. Therefore, it is crucial to consider each separately to understand what it includes.
Usually, the sources of funds in this statement may include the following items.
- Funds received from ordinary or preferred stock issued
- Funds received through debt finance
- Decrease in liabilities
- Increase in assets
- Disposal of fixed assets
- Revaluation gains on fixed assets
- Repayments received from debtors
- Increases in net working capital
On the other hand, the use of funds may include the following items.
- Loans granted to debts
- Fixed asset acquisitions
- Dividends announced or paid
- Decrease in working capital
- Decrease in assets
- Increase in liabilities
- Repayment of loans
Example
A typical example of a statement of source and use of funds may include the following.
| Sources of funds | |
| Sale proceeds | XXXX |
| Loans received | XXXX |
| Equity contribution | XXXX |
| Repayments received from debtors | XXXX |
| Disposal of fixed assets | XXXX |
| Increase in assets | XXXX |
| Defined Sources of Funds | XXXX |
| TOTAL SOURCES OF FUNDS | XXXX |
| Uses of funds | |
| Increase in liabilities | XXXX |
| Fixed asset acquisitions | XXXX |
| Repayment of loans | XXXX |
| Liability for taxes | XXXX |
| Dividends paid | XXXX |
| Defined Sources of Funds | XXXX |
| TOTAL SOURCES OF FUNDS | XXXX |
Conclusion
The statement of source and use of funds is a report that companies prepare. This report presents how companies generate funds and spend them in various areas. However, this practice is prevalent for some entities only. The cash flow statement reports the same information as the statement of source and use of funds. However, the latter uses a different approach to that process.
