ADVERTIsem*nTS:
The following points highlight the top seven uses or application of funds.
Application of Fund # 1. Purchase of Fixed Assets/Investments:
When fixed assets (i.e. Plant and Machinery, Land and Building, Furniture and Fixture etc.) or investments are purchased there is an outflow of funds i.e. an application of funds.
But if the fixed assets/investments are exchanged, there must not be any outflow of funds.
Application of Fund # 2. Payment of Dividend and Taxes:
ADVERTIsem*nTS:
Application of Fund When dividend and taxes are paid, there is an outflow of funds, i.e. an application of funds (for the actual amount so paid). But if the dividends are proposed or if there is a provision for tax, there will not be any outflow of funds. Outflow of funds will arise only when actual payment is made.
Application of Fund # 3. Redemption of Preference Shares:
When Preference Shares are redeemed, the same is treated as an outflow of fund since actual payment is made. But if Preference Shares are redeemed at a premium or at a discount, net amount must be recorded as an application of funds (i.e. in case of premium, face value plus premium and in case of discount face value minus discount).
Application of Fund # 4. Redemption of Debenture or Repayment of Loans:
When debentures are redeemed or loans are repaid the same should also be treated as an outflow of funds. Only the net amount should be considered (i.e. if redeemed or repaid at a premium or interest, the same should be taken as face value + Premium or face value plus interest) and, if redeemed at a discount, the face value minus discount should be the net amount.
Application of Fund # 5. Other Non-trading payments:
If there is any non-trading payment, the same should be treated as an outflow of funds.
Application of Fund # 6. Funds lost in-operation (i.e. Net Loss):
ADVERTIsem*nTS:
If there is any trading loss, the same is treated as an outflow of funds.
Application of Fund # 7. Increase in Working Capital:
Increase in Working Capital is an outflow of funds since more current assets are generated or current liabilities are paid.
