In which of the following cases will there be a Flow of Funds?

A. Purchase of Building for cash
B. Cash collection from debtors
C. Cash payment to creditors
D. Issue of shares for cash
E. Payment of creditors by issue of shares

Choose the correct answer from the options given below:

Correct option is D

Flow of Funds occurs when there is a movement of resources (assets or liabilities) from one part of the business to another, leading to a change in the financial position of the business. Let's analyze the given cases:

• A. Purchase of Building for cash: Yes, there is a flow of funds because cash (current asset) decreases while building (fixed asset) increases.
• B. Cash collection from debtors: No, this is a simple conversion of one current asset (debtors) into another current asset (cash), so no flow of funds occurs.
• C. Cash payment to creditors: No, this is a transfer between a liability (creditors) and a current asset (cash), so no change in financial position.
• D. Issue of shares for cash: Yes, this results in an increase in cash (current asset) and share capital (liability), indicating a flow of funds.
• E. Payment of creditors by issue of shares: Yes, creditors (liability) decrease while share capital (liability) increases, leading to a flow of funds.

Thus, the correct combination is A, D, and E.

Information Booster:

Flow of Funds specifically refers to transactions that alter the financial position of a company by affecting the working capital or liabilities.

1. Increase in Working Capital: Examples include issuing shares for cash or selling fixed assets.
2. Decrease in Working Capital: Examples include purchasing a building for cash.
3. No Flow of Funds: Transactions like payment of creditors by cash or collection from debtors, which do not change the financial position significantly.

Additional Knowledge:

1. Option B: Cash collection from debtors only converts one current asset (debtors) to another (cash). It does not affect the overall financial position.
2. Option C: Cash payment to creditors is similar, as it involves reducing cash (current asset) while decreasing creditors (current liability).
3. Flow of Funds Exceptions: Routine operational transactions, such as paying salaries, purchasing inventory, or collecting cash, generally do not constitute a flow of funds unless they affect working capital significantly.