Application of funds

The other side of the fund’s flow statement is the application of funds that side shows how the funds procured from different sources are allocated or used. There may be following uses or applications of the funds:

  1. Funds lost in Operations: Sometimes the result of trading in a certain year is a loss and some funds are lost during that trading period. Such loss of funds means outflow of funds so that item is treated as an application of funds.
  2. Redemption of the Preference Share Capital: A company can’t redeem its equity share within its lifetime but can redeem their preference share as the result of the redemption of preference share an outflow of funds takes place. So the redemption of the shares is written in the application side of the fund’s flow statement. One thing should be remembered is that the premium provided on the redemption will also be considered as an application.
  3. Repayment of Loans & Redemption of Debentures: As a share, the repayment of loans and redemption of debenture also leads an outflow of cash so these items are also treated as application of the funds. 84
  4. Purchase of any Non-current or Fixed Asset: If the businessman purchases any fixed asset or investing for the long-time period that will also generate an outflow of funds and treated as an application of funds. But if the fixed asset is purchased in exchange of any other consideration rather than cash that will not treated as application of funds.
  5. Payment of Dividend & Tax: Payment of dividend and tax are also applications if funds. Thus the actual payment of dividend and tax, which should be taken as an outflow of funds and not the mere declaration of the dividend or creation of a provision for taxation.
  6. Any other Non-trading Payment: Any payment or expenses not related to the trading operations of the business amounts to outflow and is taken as an application of funds. The examples could be drawing in case of a sole trader or partnership firm, loss of cash.