Statement of Source and Use of Fund
Statement of source and use of the fund is the change of the company’s financial position from the beginning to the end of the accounting period. It shows the source of cash that the business has been generated over the year. On the other side, it shows the summary of activities which these funds have been using during the year.
A large corporation includes a statement of source and use of funds in their annual report. It helps the investors and lenders to understand the source of funds of the firm and how they are used.
Component of Statement of source and use of fund
Statement of Source and Use of Fund consists of two main sections which are the source and use of the fund.
Source of Fund
- Net income after tax: it is the main source of funds as it receives from the main business activities. It should be the same figure in the income statement.
- Loan/bond: The company may receive cash from issuing debt security or a loan from the bank.
- Issue Share: The company can raise more cash by issuing new shares to the capital market.
- Sales Proceed of Fixed Asset: Some fixed assets will be sold after being used.
- Decrease working capital: The company will receive cash by selling some current assets such as inventory and decrease of accounts receivable. Working capital is short terms source of funds when we cannot obtain long-term deals.
Use of Fund
- Net Loss after tax: Not every business will make a profit every year. Huge funds will be spent when the company is not making a profit.
- Purchase of Fixed Asset: the company needs to pay huge cash to expand the business to increase production capacity.
- Investment: when there is surplus cash, management may invest in other companies in form of shares or bonds. They can also provide loans to other firms.
- Dividend or share buyback: The investors expected to receive dividends after investment, so it will consume some part of company cash. Moreover, the company may want to buy back some shares to gain more control.
- Increase in working capital: Management decides to use cash to increase the working capital to support the operation.