In which of the following cases will there be a flow of funds?

A. Purchase of furniture for cash
B. Payment of outstanding wages for cash
C. Purchase of building by issue of shares
D. Payment of creditor by issue of debenture
E. Cash collection from debtors

Choose the correct answer from the options given below:

Correct option is D

Introduction:

A flow of funds occurs when there is a change in working capital due to transactions that affect current assets or current liabilities. Transactions involving only non-current items (like exchanges of non-current assets or liabilities) do not result in a flow of funds. Let's analyze each option:

1. A - Purchase of furniture for cash 

   • Cash is a current asset, and furniture is a fixed asset.

   • When cash is used to buy furniture, current assets decrease, and fixed assets increase.

   • Since this transaction affects working capital, it involves a flow of funds.

2. D - Payment of creditor by issue of debenture 

   • Creditors (accounts payable) are current liabilities, and debentures are long-term liabilities.

   • When a company issues debentures to settle a creditor’s dues, current liabilities decrease, and long-term liabilities increase.

   • Since this affects the liability side of working capital, it results in a flow of funds.

Thus, A and D are the correct answers, indicating a flow of funds.

Information Booster:

What is a Flow of Funds?

• Flow of funds refers to a movement of financial resources between different assets and liabilities in a business.

• It mainly occurs when there is a change in working capital (current assets or current liabilities).

Key Factors in Flow of Funds:

• Transactions that affect working capital → Flow of funds.

• Transactions between non-current assets and non-current liabilities → No flow of funds.

  Additional Knowledge:
  

1. B - Payment of outstanding wages for cash 

   • Wages payable is a current liability, and cash is a current asset.

   • When cash is used to pay wages, both current liability (wages payable) and current asset (cash) decrease.

   • Since there is no net change in working capital, there is no flow of funds.

2. C - Purchase of building by issue of shares 

   • A building is a fixed asset, and shares are owner’s equity.

   • This transaction only affects non-current items (fixed assets and equity).

   • Since there is no impact on working capital, there is no flow of funds.

3. E - Cash collection from debtors 

   • Debtors (accounts receivable) and cash are both current assets.

   • When debtors pay cash, one current asset increases (cash), while another decreases (debtors).

   • Since total working capital remains unchanged, there is no flow of funds.​