Fund Flow Statement

 

Meaning

Fund flow statement shows the sources and uses of funds as well as net change in working capital. It is a financial statement which shows as to how a business entity has obtained its funds and how it has applied or employed its funds between the opening and closing Balance Sheet dates during the particular year or period.

Flow of Funds Chart

 

Transaction Involves between

Cost ac Fund flow 2nd year bcca

No Flow of Funds Chart

Cost ac no flow of fund BCCA 2nd year

 

Concepts

 

Importance & Limitations

 

Uses / advantages of Fund Flow Statement :

1. Fund flow statement helps the management in the assessment of long range forecasts of a cash requirements and availability of liquid resources. The manager can judge the quality of management decisions.

 

2. With the help of Fund Flow Statement, the investors are able to measure as to how the company has utilized the funds supplied by them and its financial strength. Also, the investors can judge the company‟s capacity to generate funds from operations.

 

3. It serves as effective tools to the Management for economic analysis as it supplies additional information which can not be provided by financial statement based on historical data.

 

4. Fund flow statement explains the relationship between changes in working capital and net profits.

 

5. Fund flow statement helps the management in making planning process of a company. It is also useful in assessing the resources available and the manner of utilization of the resources. 6. It explains the financial consequences of business activities. It also provides explicit and clean answer to questions regarding liquid and solvency position of the company.

 

7. Fund Flow Statement provides clues to the creditors and financial institutions as to the ability of a company to use funds effectively in the best interest of the investors, creditors and owners of the company.

 

Limitations of Fund Flow Statements

 

1. It should not be overlooked that Fund Statements ignore non-cash transactions, therefore it is considered as cruder device than the financial statement.

 

2. Fund Flow Statements merely rearrange a part of the information contained in financial statements. They do not serve as original evidence of financial status.

 

3. Though changes in cash resources are more significant, they are not highlighted by Fund Statements except being shown by them as a part of working capital.

 

4. As Fund Flow Statements are prepared from information provided by financial statements, they are essentially historical in nature.

 

 

Distinction between Cash Flow Statement & Fund Flow Statement

 

Cash Flow Statement Fund Flow Statement
It shows net change in the position of cash and cash equivalents It shows change in the position of „working capital‟.
It is based on narrower concept of funds i.e. cash and cash equivalents. It is based on broader concept of funds i.e. working capital.
Now, it is mandatory for all the listed companies and is more widely used in India or abroad. It is not mandatory and it is not being used by the companies.
Changes in working capital are adjusted for ascertaining cash generated from operations. Statement of changes in working capital is prepared under fund flow statement.
In Cash flow statement, decrease in current liability or increase in current assets results in decrease in cash and vice – versa. In working capital, decrease in current liability or increase in current asset brings increase in working capital and vice – versa.

 

 

 

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