Fund Flow Statement: Meaning and Objectives, Preparation of Fund Flow Statement

 

Meaning of Fund Flow Statement

Funds flow statement is a financial statement which indicates the inflow and outflow of fund of an organization during accounting period.

It shows the position of working capital.

It is prepared to know the received sources of funds and used funds during an accounting period.

Funds flow statement involves of two words.

They are fund and flow.

 

Fund

In limited sense, fund means cash.

But it is not correct meaning.

In broad sense, fund stands for working capital.

Working capital = Current assets – Current liabilities

 

Flow

The term flow means change or movement.

Therefore, fund flow means increase or decrease in working capital.

If working capital decreases, it is source or inflow.

If working capital increases, it is usage or outflow.

 

Funds flow statement is a statement which discloses the analytical information about the different sources of a fund and the application of the same in an accounting cycle.

It deals increase or decrease transactions of current assets and current liabilities for working capital.

Fixed assets and long-term loan for fund flow statement.

It gives a clear picture about the movement of funds between the opening and closing dates of the balance sheet.

 

 

 

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Definition

According to Roy Foulke, “A statement of sources and application of funds is a technical device designed to analyze the changes in the financial position of a business enterprise between two dates.”

According to R.N. Anthony, “Funds flow statement describes the sources from which additional funds were derived and the uses to which these funds were applied.”

 

 

Keep in Mind

Other name of fund flow statement

Statement of inflow and outflow of funds

Statement of funds received and disbursed

Statement of funds generated and expended

Statement of source and application of funds

Statement of source and use of working capital

Statement of changes in financial position

Where got and where gone statement

Movement of funds statement

 

Fund Flow Statement

Funds flow statement is prepared to give satisfactory answers to the following questions:

·          What are the main sources (inflow) and application (outflow) of funds during the period?

·          How much fund has been generated from the business operations?

·          Where did the profit go?

·          Why were dividends not larger?

·          How was it possible to distribute dividend in case of loss in business?

·          Why the net current assets are down even though there is net profit? Or vice versa

 

Objectives or Importance of Fund Flow Statement

The main objectives or importance of funds flow statement are given below:

It helps to identify changing in working capital.

It helps to analyze the changing in working capital.

It helps to determine the ability of organization to pay interest and principal amount.

It shows the relationship of net profit as change in fund from operation.

It helps to predict future fund flow from past fund flow.

It helps to identify the factors to change in assets, liabilities and equity.

It shows the extent funds were received the ways of usage for a specific period.

It shows the possibility of paying more dividend than current earnings.

The cost of capital of the business can be computed on the basis of the sources of funds flow statement.

It shows the usage of earned profits of the current year.

It shows the strength and weakness of financial position of the company.

It helps the management to allot the inadequate resources to meet the requirements of business.

It helps the management to frame or change the financial policy of the company.

It suggests ways to improve working capital position of the company.

  

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Preparation of Fund Flow Statement

Fund flow statement is prepared by comparing two years balance sheets’ figures and additional information.

It is prepared to know the changes in the financial position of the firm between beginnings and ending date.

It contains:

·          Statement/schedule changes in working capital

·          Preparation of ledger accounts

·          Profit and loss adjustment account

·          Funds flow statement

  

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