A Fund Flow Statement is a financial statement that provides information about the inflow and outflow of funds in an organization. It summarizes the movement of funds over a specific period, typically a fiscal year, and shows how the funds were obtained and how they were used.
The statement is divided into two sections – sources of funds and uses of funds. The sources of funds section show where the funds came from, such as sales revenue, loans, or investments, while the uses of funds section show how the funds were utilized, such as for operating expenses, investments, or debt repayments.
The purpose of a Fund Flow Statement is to help investors and analysts understand how an organization’s funds were generated and utilized during a particular period, which can provide insights into the organization’s financial health, cash flow position, and potential future performance.
A) Fund means cash: Under this concept, the term “funds” is used only in the sense of cash and bank balance. Here, only the changes in cash and bank are considered. Hence, the statement is called “Cash Flow statement.
This statement aims at listing the various items which bring about changes in the cash balance between two balance sheet dates. Cash planning becomes useful for control purposes. Since cash is considered a short-term asset, they are subjected to short-term fluctuations. A delay in making payment to suppliers and a provision of one month’s credit for making a payment of land purchases may show sufficient cash flow. They may reflect a satisfactory position, but it is not a reality. Therefore, the cash equivalent concept of funds is useful only for short-term financial planning and not for the long term. Thus cash and bank are one part of the fund.
B) Fund means Working Capital: Working capital is the excess of current assets over current liabilities. It means working capital = Current assets – current liabilities. It is an alternative measure of the changes in the financial position. All those transactions which increase or decrease working capital are included in this statement. It excludes all such items which do not affect the working capital. The working capital concept of funds conforms with normal accounting procedures. Hence, a funds flow statement based on this concept fits well with the other statements. Moreover, working capital is also a measure of the short-term liquidity of the firm. Therefore, an analysis of factors bringing about a change in the
amount of net working capital is useful for decision-making by shareholders, creditors, and management. Due to these reasons, the working capital approach to funds is more useful than the cash approach.
195 The operating cycle of working capital (working capital flow) is as follows:
C) Fund means total financial resources: The term “funds” is very often used in the sense of useful financial resources also. The cash approach and working capital approach both are incomplete and inadequate to the extent that they omit a few major financial and investment transactions.
Such items do not affect net working capital. But, if they are included, they would certainly provide qualitative information for the decision-making, For example, issuing equity shares and debentures for the purchase of buildings or assets shall not have any effect on the working capital. But it is a significant financial transaction that should be disclosed. Therefore, this concept seems to be the best approach to disclose the changes in the financial position as compared to other concepts. It conforms with
the statutory regulations and legal requirements.