Fund flow statement Definition & Meaning:
Its a statement prepared¬†to analyze reasons for changes in two balance sheet periods in financial position of the company. It presents the inflow and outflow of funds in an understandable manner. ¬†In short, it a fund flow statements is prepared to explain changes between working capital of company from one balance sheet date to another.
It is nothing but plotting of inflow and outflow methods of fund.
Inflow of funds is through two manners:
- Long term inflow through issue of shares or issue of other securities
- Funds from operations
If the long term requirements of firm is fulfilled just by issue of shares or other securities, then funds generated operations will reflect the increase in working capital during the period. However, if¬†funds from operations are not sufficient to fund the working capital requirements, there will be an decrease in working capital.
Cash Flow V/S Fund Flow Statement
Now, you may think that what is the difference cash flow and fund flow statement, as both the statements appear to be similar in nature with each other. ¬†Here are some of the points that differentiate cash flow statements from fund flow statements.
- In cash flow only items affecting cash and cash equivalents are considered. While in case of fund flow, which is prepared on accrual accounting system.
- Fund flow statements analyzes application of funds and sources of funds from Long term sources and changes in working capital is considered. At the same time, in case of cash flow statements, changes in current assets and current liabilities is considered while preparation.
- Fund flow statement is more useful in case of long term financial planning, while cash flow can be used to identify and correct the liquidity problems.
- Fund Flow statements in nothing but reconciliation of funds generated from various sources and there application. As compared, cash flow statements starts from opening ¬†balance of cash and cash equivalent and tallies with cash and cash equivalent at the end of period.
How to Prepare Fund Flow Statement
Now guys, you must be thinking, how we can prepare fund¬†flow statement. Here is the solution to your question…..
Find the sample format of fund flow statement ¬†below.
Benefits of fund flow Statement
- Fund flow statement are very useful for long term analysis. As the fund flow statements provides information that is not provided by balance sheet and profit and loss account, like reasons for changes in working capital and application and sources of generation of funds. Hence, fund flow statements is useful tool in the hands of management to analyze the financial status of the company.
Fund flow answers the following questions:
- Where have the profits gone?
- Why there is an imbalance in existing liquidity position and profit position of an enterprise?
- Why is the business concern financially solid in spite of losses?
2. The fund flow statement analysis helps the management to keep a check whether working capital has been properly utilized or not. Also in addition, status of working capital is very important in case of declaration of dividend, etc.
Benefits of preparation of Changes in working capital:
The statement of changes in working capital (fund) is prepared by taking the current account balances from the balance sheet. It is prepared for the period for which funds flow is being analysed which generally is the accounting period.
It provides us the information relating to change in the values of the various current account balances by comparing the balance as on the first day (opening balance) with the balance on the last day (closing balance) of that period.
The aggregate value of the changes in the current accounts would give us the net change in working capital (fund) over the period.
Funds flow analysis not possible from the Statement of changes in Working Capital
From the statement of changes in working capital, we can only say that there is a change in fund (working capital) on account of a change in so and so current account balance.The statement only provides the information relating to the magnitude of the fund before and after the flow along with the magnitude of change in the fund.
Funds flow analysis involves analysing the flow i.e. finding the reasons for the flow. This involves dealing with the actual transactions that have caused the flow.
The statement of changes in working capital does not provide any information relating to the actual transactions that have caused that change.
For analysing Funds Flow we need additional information
Cross transactions are the reason for funds flow.Of all the accounting transactions that have brought about a change in the current accounts, only cross transactions would be relevant in analysing funds flow.
To analyse funds flow using the information relevant to current accounts, we need consider all the accounting transactions that have affected current accounts and from among them we need to identify the cross transactions which have also brought about a change in the fund (working capital).
Minimizing the effort
Cross transaction involves a current account and a non-current account. Cross transactions are all that we need to be able to analyse funds flow.The magnitude of accounting transactions involving non-current accounts are generally far lesser compared to the accounting transactions involving current accounts.
Therefore, in analysing funds flow we try to identify the cross transactions using the changes in non-current accounts.
How to prepare Fund flow statement:
Prepare Statement of changes in working capital. There may be many reasons of changes in working capital like Purchase of Fixed assets without raising corresponding long term funds/ sale of fixed assets without corresponding long term purchases/ sale of investments/ purchase of long term investments from bank balance/ Repayment of loan, etc.
Prepare fund flow from operations. Fund flow from operations is similar to that of cash flow from operations. It should not contain any items from investing/ financing activities. Same needs to be prepared as follows:
|Depreciation of assets||xxx|
|Amortization of assets||xxx|
|Loss on sale of investments||xxx|
|Loss on sale of fixed assets||xxx|
|Losses from other non operating operations||xxx|
|Profit on sale of investments||xxx|
|Profit on sale of fixed assets||xxx|
|Profit from other non operating operations||xxx|
|Net fund flow from operations||xxx|
Preparation of fund flow statement:
While preparing fund flow statement, the sources and uses of fund¬†are to be disclosed, so that it highlights the sources from were funds are generated and areas in which they are spend.