Funds flow statement comprises three words: fund, flow and statement.
Fund means the financial resources used by a concern. In the sense of working capital. 'Fund' represents the net working capital. The excess current asset over the current liabilities is called net working capital. Similarly.
The term Flow means the movement of funds and includes both inflows (receipt) and outflows (payments) of found. Funds from operation, issue of share and debentures, additional long term debt, non operating revenues etc. are considered as the major sources of fund. Increase in working capital, redemption of debenture, repayment of long term loan, payment for non operating expenses etc. are the amine areas of uses of fund.
The term Statement represents the format or account under which the flows of fund i.e. cash inflows and outflows are recorded.
Funds flows statement is known by various names such as statements of sources and uses of founds, summary of financial operations, which got and where goes statement, movement of working capital statement, funds received and disbursement statement etc.
Objective and Importance of Funds Flow Statement
1. To Explain the Changes in Financial Position:
The objective of funds flow statement is to disclose the cause of changes in the assets, liabilities and equity capital between two balance sheet dates. It highlights the changes in financial position of a concern and indicates the various means by which funds were obtained during a particular and the ways to where these funds were utilized.
2. To Analyze the Operational Position:
Another objective of found flow statement is to analyze the operational position of a concern. Balance sheet gives a static view of the financial position and the profit and loss reported by income statement cannot tell about the actual liquidate position of a firm. Sometimes a firm with high profit may not be able to pay its immediate liabilities due to the shortage of cash. But the objective of funds statement is to explain both the causes of various in different assets, liabilities and capital accounts and their effect on the liquidity position of the concern.
3. To Help in Proper Allocation of Resources:
The objective of funds flow statement is to provide information regarding the allocation of limited resources with more efficiently and effectively. It provides the information about the internal and external sources of financing furthermore. It provides data regarding the unbalance fund. On the basis of such information a concern can allocate its funds in and long-term areas more properly.
4. To Evaluate Financial Position:
Internal and external users of financial statements require funds flow statement for the purpose of assessing the strengths and weakness of the concerned firm. Funds flows statement provides information regarding the changes in net information enable various groups of users to assets and evaluate the financial position of the firm.
5. To Act as Future Guide:
Funds flow statement acts as a guide for future to management. Funds flow statement provides information about the historical changes in net assets and capital which enable the management to develop a projected funds flow statement. Such projected funds flow statement helps to product need for found and alternative sources of financing.
Limitation of funds flow statement
Funds flow statement is a major tool of financial analysis, however, it as the following limitations:
1. Ignores the Non-Fund Transactions:
Fund flow statement ignores the non-fund transactions i.e. it does not take into consideration those transactions which do not affect the working capital. For example, funds flow statement does not record the purchase of fixed assets by the issue of share or debentures.
2. Based on Secondary Information:
Funds flow statement is based on secondary data. In other words, funds flow statement is based on income statement and balance sheet.
3. Historical in Nature:
Funds flow statement is historical in nature because it is prepared on the basis of historical financial statement i.e. balance sheet and income statement.
Procedures of Preparing Funds Flow Statement
Funds flow statement is prepared on the basis of balance sheet of two subsequent dates and other information such as net profit or loss reported by income statement, operation and non operating expenses, losses and gains etc. the procedures of preparing funds flow statement consists of the following three steps:
Net working capital is related with current assets and current liabilities. A fund from operation is determined with the help of net income or loss, non-operating and non-cash items. Similarly, funds flow statement is prepared from the differences of non-current assets, non-current liabilities and non-operating items.