The statement of changes in financial position

The statement of changes in financial position is a statement of flow, i.e. it measures the changes that have taken place in the financial position of a firm between two balance sheet dates. It summarises the sources from which funds have been obtained and the uses to which they have been applied. As a statement of sources and uses of funds, drawing on the information contained in the basic financial statements, it shows the source of funds and application of funds during the period. The changes in financial position could be related to several different concepts of funds. The two most common usages of the term funds are cash and working capital. Viewed in this sense, the statement of changes in financial position would explain the changes in cash or working capital. Accordingly, we have two statements i.e. statement of changes in cash known as cash flow statement and the second is statement of changes in working capital known as sources and uses statements or funds flow statements.  

  

Flow of Funds: the term flow means both inflow and outflow. The ‘flow of funds’ means transfer of economic values from one assets 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 result in the increase of funds, it is called a source of funds and if it result in decrease in 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.

Cash flow statement: A statement of changes in the financial position of firm on cash basis is called a cash flow statement. Such statement enumerates net effect of the various business transactions on cash and takes into account receipt and disbursement of cash. A cash flow statement summarises the causes of changes in cash position of a business enterprise between dates of two balance sheets.