## Funds Flow Analysis: When Working Capital Changes
### Concept
When 'funds' are defined as working capital (i.e., Current Assets − Current Liabilities), a transaction causes:
- Inflow of funds → working capital increases
- Outflow of funds → working capital decreases
- No effect → working capital unchanged
A change happens only when one side of the equation involves a non-current item (fixed asset, long-term liability, capital, reserves). Transactions entirely within current items, or entirely within non-current items, do NOT change working capital.
### Decision Rule
| Transaction Type | Effect on WC |
|---|---|
| CA ↑ vs Non-CA/Non-CL | Inflow |
| CL ↑ vs Non-CA/Non-CL | Outflow |
| CA ↑ and CL ↑ equally | No effect |
| CA ↓ and CL ↓ equally | No effect |
| Non-current item vs Non-current item | No effect |
### Worked Application (from ICAI)
(i) Purchase of fixed asset on 2-month credit:
- Fixed Asset (Non-CA) ↑; Creditors (CL) ↑.
- CL rises but CA unchanged → Outflow of funds.
(ii) Sale of fixed asset (BV ₹8,000) at a loss of ₹7,000:
- Cash received = ₹1,000; Fixed asset (Non-CA) ↓ by ₹8,000.
- CA ↑ by ₹1,000; CL unchanged → Inflow of funds.
(iii) Payment of final dividend already declared:
- Proposed Dividend (CL) ↓; Cash (CA) ↓ — both current → No effect.
- OR if proposed dividend treated as Non-CL, then Outflow.
(iv) Writing off bad debts against provision for doubtful debts:
- Debtors (CA) ↓; Provision (deducted from CA) ↓ — net CA unchanged → No effect.