Objectives of the Fund Flow Statement

Fund flow statement is the statement of sources and uses of fund. Fund flow statement shows the original source from which the cash are receive and the areas that they obtained funds have been applied. Funds flow statement shows various mean by which funds were received during a particular period and the ways in which these funds were applied.

The Objectives of the Fund Flow Statement are

To describe the changes in financial position the goal of funds flow statement is to disclose the cause of changes in the assets, liabilities and value capital between two balance sheet dates. It features the changes economic position of a concern and indicates the various means by which funds were obtained within a particular and the ways to where these funds were employed.

Fund flow statement is to analyze the in business position of a matter. "Balance Sheet" gives a static view of the financial position and the Profit and loss reported by income statement cannot find out about the actual cash out position of a company. Sometimes a strong with high profit might not exactly be able to pay its immediate liabilities due to the shortage of cash. Yet the objective of money statement is to make clear both the causes of various in several assets, financial obligations and capital accounts and their effect on the liquidity position of the care.

With the help of funds flow assertion we get information about the allocation of limited resources with an increase of proficiently and effectively. It gives you the information about the internal and external sources of financing. It gives you data about the unbalance pay for. On the basis of such information a problem can allocate its funds in and long-term areas more properly.

It helps to get Internal and external users of financial claims require funds flow assertion for the purpose of assessing the strengths and weakness of the worried firm. Funds flows affirmation provides information about the changes in net information permit various groups of users to assets and assess the financial position of the firm.

Meaning of funds flow statement in management accounting

The term ‘flow’ means movement and includes both ‘inflow’ and ‘outflow’. The term ‘flow of funds’ means transfer of economic values from one asset of equity to another. Flow of funds is said to have taken place when any transaction makes changes in the amount of funds available before happening of the transaction. If the effect of transaction results in the increase of funds, it is called a source of funds and if it results in the decrease of funds, it is known as an application of funds. Further, in case the transaction does not change funds, it is said to have not resulted in the flow of funds. According to the working capital concept of funds the term ‘flow of funds’ refers to the movement of funds in the working capital. If any transaction results in the increase in working capital, it is said to be a source or inflow of funds and if it results in the decrease of working capital, it is said to be an application or out flow of funds.

The flow of funds occur when a transaction changes on the one hand a non current account and on the other a current account and vice- versa.

When a changes in a non current account e.g., fixed assets, long-term liabilities, reserves and surplus, fictitious assets etc., is follow by a change in another non-current account, it does not amount to flow of funds. This is because of the fact that in such cases neither the working capital increases nor decreases. Similarly, when a change in one current account results in a change in another current it does not affect funds. Funds move from non current to current transactions or vice- versa only. In simple language funds move when a transaction affects

    A current asset and fixed asset

    A fixed and current liability

    A current asset and a fixed liability

    A fixed liability and a current liability

And funds do not move when the transaction affects fixed assets and fixed liability or current assets and current liability. To understand flow of funds, it is important to classify various accounts and balance sheet items into current and non- current categories. Current account can either be current assets or current liabilities. Current assets are those assets which in the ordinary course of business can be converted into cash with in a short period of normally one accounting period. Current liabilities are those liabilities which are intended to be paid in the ordinary course of business with in a short period of normally one accounting year out of the current assets or the income of the business. 

What is fund flow statement an importance

The basic financial statement, i.e., the balance sheet and profit and loss account or income statement of business, reveal the net effect of the various transactions on the operational and financial position of the company. The balance sheet gives us a summary of the assets and liabilities of an undertaking at a particular point of time. It reveals the financial status of the company. The assets side of a balance sheet shows the deployment of resources of an undertaking while the liability side indicates its obligations, i.e., the manner in which these resources were obtained. The profit and loss account reflects the results of the business operations for a period of time. It contains a summary of expenses incurred and the revenue realized in an accounting period. Both these statements provide the essential basic information on the financial activities of a business, but their usefulness is limited for analysis and planning purpose. The balance sheet gives a static view of the resources or liabilities of a business and uses or assets to which these resources have been put a certain point of time. It does not disclose the cause for changes in the assets and liabilities between two different point of time. The profit and loss account, in a general way, indicates the resources provided by operations. But there are many transactions that take place in an undertaking and which do not operate through profit and loss account. Thus, another statement has to be prepared to show the change in the assets and liabilities from the end of one period of time to the end of another period of time. The statement is called a statement of changes in financial position or a fund flow statement.

The fund flow statement shows movement of funds

The fund flow statement is a statement which shows the movement of funds 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 way in which these funds were employed. In simple words, it is a statement of sources and application of funds.