Funds Flow

Decrease in working capital occurs in two situations

When CA decreases n CL remains constant-Suppose as on 31^st Mar 2009  n 31st Mar 2010 Debtors account  shows a balance of Rs10000 n  Rs 8000 respectively .It means that company have received Rs 2000 from debtors. So, it can be said that decrease in WC is a source of fund

When CL increases n CA remains constant-Suppose as on 31^st Mar 2009 n 31st Mar 2010 Creditors account  shows a balance of Rs 9000 and  Rs 10000 respectively. It  means that creditors have increased by Rs 1000 bcoz of non-payment to them which is also a source of fund for co.

Vice-versa will happen in case of increase in working capital

Yes. Absolutely Correct. I completely agree with the above explanation. And perfectly explained !!

Correctly explained.

N0 Doubt Mr. Prashant has clearly explained.....

Here is my observation.

After calculating all requirements to prepare funds flow statement, just fill the items in the sources and application column of statement. If there is difference, say, Application is more than sources, then the interpretation is that, working capital has been used for long term investment purposes, i.e along with the other souces of funds, even working capital is utilised. On the contrary, if the sources are more than application, then, interpretation would be that the firm has used only long term funds for long term investment purposes, and working capital would just added as a balancing figure, i.e sources of funds which is in excess will lie in bank/cash, so we say just say applied for balancing purposes.

Comments are welcome. Thank you.    

Very Well Explained By Prashant...

Totally Agree 

100% agree with Prashant