fund flow statement

fund flow statement

CONTENTS


 INTRODUCTION
MEANING
DEFINITION
OBJECTIVE
SIGNIFICANCE
 LIMITATIONS
CONCLUSION






INTRODUCTION
The basic financial statement i.e., the balance sheet and profit & loss account or income statement of business, reveal the net effect of the various transaction on the operational and financial position of the company. These statements do not show as to how have the funds been earned and used during the accounting period. Another statement has to be prepared to show the change in the assets and liabilities from the end of one period of the time to the end of another period of time.

MEANING
Funds flow statement is a modern technique of analyzing financial statement. Fund flow statement shows as to where have the funds come from and where have they been used during the accounting period. It helps in analyzing the movement of funds of a firm between the two balance sheet date. Fund flow statement is prepared by enlisting the source and uses or application of funds . if the source are more than the uses , there is increase in working capital and if the uses are more than the source , there is decrease in working capital.
Meaning of fund:- The excess of current assets over liabilities.
Meaning of flow: Flow means change. When there is a change in the amount of funds, it is said to that there is a flow of funds.



DEFINITION:- “The funds flow statement is a statement which shows the movement of funds and and is a report of the financial operations of the business undertaking. “
It indicates various means by which funds were obtained during a particular period and the ways in which these funds employed.
In simple words , it is a statement of sources and application of funds.
RULE:- The flow of funds occurs when a transaction changes on the one hand a non-current account and on the other a current account and vice-versa.




OBJECTIVE OF FUNDS FLOW STATEMENT

(1) Helpful in finding the answer to some important financial question:-
A fund flow statement is prepared to give satisfactory answer to the following question:-
(a)What have been the main source and application of funds during the period?
(b)How much funds have been generated from business operations?
(c)Where did the profits go?
(d)why where dividends not larger?
(e)How was it possible to distribute dividends in excess of current earning or in the presence of net loss for the period?
(f)Why the net current assets are are up even though there is a net loss for the period?
(g)How was the expansion in plant and equipment financed?
(h)How was the repayment of long term debt accomplished?
(i)How was the increase in working capital financed?

(2) Helpful in financial analysis:- A fund flow statement provides a complete analysis of the financial of the financial position of a firm.

(3) It provides more reliable figures of profit and loss of the business:- It gives much more reliable figure of the profits of the business than the figures shown by P/L account bcoz the figure of profit shown by P/L account is affected by the personal decision of management in deciding the amount of depreciation and other adjustments regarding the writing off preliminary expanses etc.

(4) It enables to know whether the funds have been properly used:- The funds flow statement enables the management to know whether the funds have been properly used in purchasing various assets or repaying loans etc.

(5) Helpful in proper management of working capital:- While managing working capital in a business, it becomes essential to ensure that it should neither be excessive nor inadequate. A fund flow statement indicates the excessiveness or inadequacy in working capital.

(6) Helps in preparation of budget for the next period:-
A fund flow statement is prepared for next year, it will enable the management to plan its financial resources properly. The firm will know how much funds it requires, how much the firm can manage internally and how much it should arrange from outside source. This is helpful in preparing the budgets for the future period.

(7) It helps a firm in borrowing operations:- A fund flow statement prepared for the future period indicates whether the company will have sufficient funds to repay the interest & loans in time.

(8) Helpful in determining dividend policy: - Sometimes, there may be sufficient profit but the distribution of dividend may not be possible due to its adverse effect on the liquidity and working capital of the business. in such cases a funds flow statement help in leading whether to distribute the dividend or not because a funds flow statement will reveal from where and how much funds can be managed for distributing the dividends.

(9) Useful to shareholders:- Shareholders also get information about the financial policies of the enterprise with the help of fund flow statement.

SIGNIFICANCE OF FUNDS FLOW STATEMENT
1) It helps in analysis of financial operations.
2 ) It acts as a future guide.
3) It helps in the formation of realistic dividend policy.
4) It helps in the allocation of resources properly.
5) It helps in working capital management of the company.
6) It helps in raising the loans.
7) It helps in making plans for future.
8) It appraises the shareholders regarding the uses of funds in the business.
9) It provides a basis for preparation budgets for the future.
10) It points out the financial strengths and weaknesses of the business.

LIMITATIONS OF FUNDS FLOW STATEMENT

1)Historical :- It relates to past only and thus it tells that the changes in funds have taken place in the past. It will be of limited use for making predictions for the future
2) Static:- It is static in nature. This statement fails to reveal the continuous changes.
3) Incomplete statement :- This statement does not show the changes in working capital. It only presents the changes in working capital.
4) Non original statement:- It is not an original statement but simply re-arrangement of financial data.
5) Not a substitute:- It is not a substitute of income statement or a balance sheet. It is only a supplement to them.









CONCLUSION

The funds flow statement is a summary covering a period of time of the transactions that resulted in a cha