How to Analyze a Sources and Application of Funds Statement Cash Crisis
Performance Support:
How to Analyze a Sources and
Application of Funds Statement
This guide was created by subject matter experts with experience in financial analysis. It explains how to
interpret information found in a company’s sources and application of funds statement to determine what
assets the company is investing in and how the company has financed those investments.
Overview
What does the A sources and application of funds statement is a financial document that details:
sources and
what a company is spending funds on (application)
application of
funds where the funds for that spending have come from (sources)
statement
show?
A sources and application of funds statement is of particular interest when analyzing a
company’s balance sheet. The sources and application of funds statement allows analysts
to determine whether assets are being financed appropriately—that is, whether short-term
assets are being financed by short-term liabilities and long-term assets by long-term
liabilities.
What sources There are several ways in which companies obtain funds:
do companies
by taking on additional liabilities in the form of capital or debt
use to fund
their activity? by reducing—or selling—assets in order to free up liquidity
through the generation of profits
through depreciation
o Though depreciation is shown on the profit and loss statement as an
expense, this is only a book entry. Depreciation does not require a cash
outlay. Since the sources and application of funds statement is only
concerned with the actual movement of funds, the figure for depreciation is
added back into profits.
How do In balance sheet terms, companies use funds for three main activities:
companies
To acquire additional assets—funds allow a company to acquire the assets it
apply funds?
needs to grow, such as new equipment or additional land.
To reduce debt or pay back capital—companies use funds to make loan
payments, for example, or to distribute dividends to shareholders.
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How to Analyze a Sources and Application of Funds Statement Cash Crisis
Analysis
How do I A sources and application of funds statement is created by comparing the balance sheets
analyze a from two different periods—usually two fiscal years.
sources and
application of Analysts calculate the precise increases and decreases in both assets and
funds liabilities that have occurred from one year to the next.
statement?
Once these variations have been calculated for each balance sheet item, they are
recorded in a table like the one below:
Application
Empleos of Funds
(Aplicación de fondos) Sources
Fuentes of Funds
(Origen de los fondos)
INCREMENTOS
INCREASES INDE ACTIVO
ASSETS ___ INCREMENTOS
INCREASES DE PASIVO
IN LIABILITIES ___
DECREASES IN LIABILITIES
DECREMENTOS DE PASIVO ___ DECREASES INDEASSETS
DECREMENTOS ACTIVO ___
LOSSES
PÉRDIDAS ___ DEPREC. FOR THE
AMORTIZACIONES PERIOD
DEL PERÍODO ___
PROFITS
BENEFICIOS ___
Total ___ Total ___
The items that appear in the column “Application of Funds” indicate how funds were used
during the time period under analysis. The items that appear in the “Sources of Funds”
column indicate where the funds came from during that same period.
For example, funds might be applied to the purchase of new machinery. The
source of these funds could be additional capital contributed by new stockholders,
or a short-or long-term loan.
Another example of an application is the cancellation of debt (a liability). The
source for these funds might be a decrease in the level of accounts receivable (an
asset).
When you examine a sources and application of funds statement, use the following
questions as criteria to guide your analysis:
What are the principal balance sheet items to which the company has
applied funds? Are these expenditures or investments aligned with the
company’s strategy and regular operations?
Are short-term liabilities being used to finance short-term assets?
Are long-term liabilities being used to finance long-term assets?
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How to Analyze a Sources and Application of Funds Statement Cash Crisis
For example, examine the sample sources and application of funds statement below.
Sources and applications statement for the period:
CONCEPT FUNDING INVESTMENTS
Figures in.000€ % %
Intangible Assets 0 0% 737 7%
Tangible Assets 0 0% 5.559 55%
Financial Assets 662 7% 0 0%
CURRENT ASSETS 0 0% 3.498 35%
EQUITY 1.578 16% 0 0%
LONG TERM LIABILITIES 0 0% 320 3%
SHORT TERM LIABILITIES 7.874 78% 0 0%
TOTAL 10.114 100% 10.114 100%
In this example, you should observe the following:
In the period under analysis, the company has invested considerably in tangible
assets, for the amount of €5.5 million. This amount accounts for 55% of all
investment.
Investment in current assets amounts to €3.49 million, which accounts for the
remaining 35%.
These investments have been funded with short term-debt for the amount of €7.8
million and with equity for the amount of €1.57 million.
The company has incorrectly financed more than €5 million of long-term assets with short-
term liabilities—it has used short-term debt to finance investments that it may not receive
payback on for ten or fifteen years. The company will have to pay back the short-term loan
in less than one year—long before the investments have been cashed out.
Sources and Application of Funds Statements vs. Cash Flow Statements
What is the A sources and applications of funds statement contains much of the information found in a
difference cash flow statement. However, there are several important differences between the two
between a
sources and documents.
application of
funds
statement and
a cash flow
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How to Analyze a Sources and Application of Funds Statement Cash Crisis
statement? Sources and application of funds statement:
A sources and application of funds statement is primarily used in European
countries, like Spain.
It allows analysts to compare, item by item, what a company has invested in and
how the company has funded those investments.
It is useful for examining a company’s financial history—for analyzing how a
company finds itself in a specific current financial situation.
Cash flow statement:
A cash flow statement, on the other hand, is the document most American analysis
use.
It details a company’s cash balance by showing what a company has spent funds
on in a given period and then showing what funds the company has left after it has
made those investments.
Cash flow statements are the documents most analysts use when they produce
financial forecasts—the statement helps analysts determine how the company’s
cash flow will look in the future.
