Which among the following is not included in uses of funds ?

Q: Which among the following is not included in uses of funds ?

Which among the following is not included in uses of funds ?

Question

Accepted Answer

The correct option is 4:
The core concept in a Funds Flow Statement is the change in **Working Capital** (Current Assets minus Current Liabilities). A transaction is considered a 'Use of Funds' (or Application of Funds) only if it results in a net **decrease** in the working capital. The transaction, "Purchase of fixed asset against shares," involves only two non-current accounts: a non-current asset (Fixed Asset) and a non-current liability/equity (Issue of Shares). A transaction occurring entirely between a non-current asset and a non-current liability/equity has no effect on the current assets or current liabilities, and therefore causes **no flow of funds**. Since this transaction does not decrease the working capital, it is correctly identified as *not* a use of funds.

The incorrect option is 1:
Operating Losses are a major use of funds. Profit from Operations is typically a Source of Funds, but when a loss is incurred, it becomes a distinct Use of Funds. An Operating Loss signifies that the company’s operating expenses exceeded its revenues, and this deficit reduces the net retained earnings. The reduction in retained earnings ultimately leads to a decrease in the overall working capital of the business. Thus, recording an Operating Loss is an explicit application of funds that depletes the pool of working capital.

The incorrect option is 2:
The Payment of dividend and taxes represents a standard Use of Funds. When a company pays dividends to shareholders or pays taxes to the government, the payment is made using a current asset, specifically cash or bank balance. Since a current asset is reduced, and the corresponding liability (which was either a non-current reserve or a current liability that is also reduced) results in a net decrease to working capital, the transaction is categorized as an application of funds. These payments reduce the liquid resources available to the firm.

The incorrect option is 3:
Non-trade Payments are generally classified as a Use of Funds because they involve the deployment of working capital. These payments include items not directly related to buying or selling goods, such as the repayment of a long-term loan or the purchase of a non-current investment. In these cases, the transaction involves a decrease in a current asset (Cash/Bank) and a change in a non-current account (e.g., Long-Term Debt). This combination causes a reduction in working capital, qualifying the non-trade payment as a clear use of funds.