Fund Flow Cash Flow
Content
Fund flow statement
Q.
What is Fund Flow Statement? How is it prepared?
Ans. Meaning of Fund Flow Statement :– The balance sheet of a firm discloses
the position of assets, liabilities and capital at the end of a particular year. But
it does not disclose the causes of changes in these items between the end of
previous year and the end of current year. Therefore, an additional statement
called ‘Fund Flow Statement’ is prepared to show the changes in assets,
liabilities and capital between the dates of two balance sheets.
Meaning of Funds :– In a limited sense, the term ‘fund’ means ‘cash’. But this
is not the correct meaning of the term ‘fund’ because there are many
transactions in the business which do not result in inflow or outflow of cash but
certainly result in the inflow or outflow of funds. As such, the term ‘fund’ stands
for ‘Net Working Capital”.
Meaning of Flow :– The term ‘flow’ means change or movement. Therefore, the
term ‘Flow of Funds’ means increase or decrease in working capital. If a
transaction results in the increase of working capital, it is said to be a source of
funds and if the transaction results in the decrease of working capital, it is said
to be an application of funds. If the transaction does not result in any change in
the working capital, it is said that it does not result in the flow of fund.
Preparation of Fund Flow Statement :– For preparing Fund Flow Statement
we have to prepare the following three statements:
(1)
Schedule of Changes in Working Capital :– This schedule considers only
current assets and current liabilities, at the beginning and at the end of
the year. This schedule shows either increase or decrease in working
capital.
SCHEDULE OF CHANGES IN WORKING CAPITAL
Particulars
Current Assets:
Ø Cash-in-hand
Ø Cash at Bank
Ø Debtors
Ø Closing Stock
Ø Short Term
investments
Ø Bills Receivables
Ø Prepaid Expenses
Ø Other current assets
Amount
As on
………..
Amount
As on
………..
________
________
Increase in
Working
Capital
Decrease in
Working
Capital
Total Current Assets
Current Liabilities:
Ø Bank Overdraft
Ø Bills Payable
Ø Creditors
Ø Provision for Taxation
Ø Proposed Dividend
Ø O/s Expenses
Ø Unclaimed Dividend
________
________
________
________
Total Current Liabilities
________
________
________
________
Working Capital (Current
Assets –Current Liabilities)
Net Increase or Decrease
in Working Capital
(2) Calculation of Funds from Operations :– In order to prepare a funds
flow statement it is necessary to ascertain the sources and application of
funds. Main source of fund in a business is funds from operations
STATEMENT SHOWING ‘FUNDS FROM OPERATIONS’
Particulars
Net Profit As per Profit & Loss A/c
(A) Items to be Added back to Net Profit:
(a) Non-Fund Items:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(b)
Depreciation.
Goodwill written off.
Preliminary Expenses.
Patent Rights, Trade Marks and Copy Rights.
Discount on issue of Debentures & Shares.
Deferred Revenue Expenditure such as,
Advertisement Suspense A/c.
Non- Trading Losses:
(i) Loss on sale of Fixed Assets
(ii) Appropriation of Profit:
Transfer to General Reserve
Transfer to Sinking Fund
Transfer to Dividend
Equalisation Fund etc.
(i) Proposed Dividend
Amount
(ii)
Provision for Taxation
(B) Items to be Deducted from Net Profit
(i) Profit on sale of Fixed Assets
(ii) Receipt of Dividend
(iii) Re-Transfer of Excess Provisions
Ø
Fund Flow Statement :– Fund Flow Statement is prepared to show the
changes in assets, liabilities and capital between the dates of two balance
sheets. It discloses the causes of changes in the items of balance sheet
between the end of the previous year and the end of current year. Thus, by
preparing this statement, the management can find out the basic reasons
for changes in the assets, liabilities and capital of the firm between two
balance sheets.
FORMAT OF FUND FLOW STATEMENT :–
FUND FLOW STATEMENT
Sources of Funds
Applications of Funds
1.
Funds from Operations
1. Loss from Operations
2.
Issue of Shares
2. Buy back of Equity shares and
Redemption of Preference Shares
Q.
3.
Issue of Debentures
3. Redemption of Debentures
4.
Raising Long-Term Loans
4. Repayment of Long-Term Loans
5.
Sale of Fixed Assets
5. Purchase of Fixed Assets
6.
Non-Trading Receipts
6. Non-Trading Payments
What is Fund Flow Statement? What are the uses and Limitations of
Fund Flow Statement?
Ans. Meaning of Fund Flow Statement :– The balance sheet of a firm discloses
the position of assets, liabilities and capital at the end of a particular year. But
it does not disclose the causes of changes in these items between the end of
previous year and the end of current year. Therefore, an additional statement
called ‘Fund Flow Statement’ is prepared to show the changes in assets,
liabilities and capital between the dates of two balance sheets.
Uses of Fund Flow Statement :–
1.
Helpful in Finding the Answers to Some Important Financial
Questions :– A fund flow statement is prepared to give satisfactory answer
to the following questions:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
What have been the main sources and applications of funds during
the period?
How much funds have been generated from business operations?
Where did the profits go?
Why are dividends not larger?
How was the expansion in plant and Equipment financed?
How was the repayment of long term debt accomplished?
How was the increase in Working Capital financed?
2.
Helpful in Financial Analysis :– A fund flow statement provides a
complete analysis of the financial position of a firm. This objective is not
achieved by the balance sheet because it gives a static view of the financial
position of a business by showing the assets and liabilities at a particular
point of time.
3.
It provides more reliable figures of profit and loss of the business :– A
fund flow statement gives a much more reliable figure of the profits of the
business than the figures shown by profit and loss account is affected by
the personal decisions of management in deciding the amount of
depreciation and other adjustments regarding the writing off of
preliminary expenses etc.
4.
It enables to know whether the funds have been properly used :– The
fund 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.
Help in the presentation of Budget for the next period :– If 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.
Helpful in Determining Dividend Policy :– Sometimes, there may be
sufficient profits but the distribution may not be possible due to its
adverse effect on the liquidity and working capital of the business.
Limitations of Fund Flow Statement :–
1.
Fund flow statement ignores certain non-fund transactions.
2.
It reveals only the changes in working capital and does not show the
changes in cash position.
3.
It is historical in nature because it reports what has happened in the past.
4.
Since it is based on opening and closing balance sheets and the profit and
loss account, it is not an original statement.
Q.
What is Cash Flow Statement? Give the Format of Cash Flow
Statement Or How is it prepared?
Ans. Cash Flow Statement :– A cash-flow statement is a statement showing
inflows and outflows of cash during a particular period. In other words, it is a
summary of sources and applications of cash during a particular span of time.
It analyss the reason for changes in balance of cash between the two balance
sheet dates. The term ‘cash’ here stands for cash and cash equivalents. A cashflow statement can be for the past or can be projected for a future period.
FORMAT OF CASH FLOW STATEMENT :– A cash flow statement may be
prepared either by direct or indirect method. Format under indirect method is
given below:
XYZ LTD.
CASH FLOW STATEMENT for the year ending………………
(Indirect Method)
Particulars
Amount
(A) Cash Flows from Operating Activities :–
Net profit before Tax
Add : Non-Cash Expenses
: Non-operating Expenses
.............
.............
.............
Operating Profit before Working Capital Changes
________
Add : Decrease in Current Assets
: Increase in Current Liabilities
.............
.............
________
(.............)
(.............)
________
.............
(.............)
Less : Increase in Current Assets
: Decrease in Current Liabilities
Cash generated from operating activities
Income Tax paid
Amount
Cash flows before extraordinary items
(+) or (-) Extraordinary items
________
.............
.............
Net Cash from Operating Activities
________
.............
(B) Cash Flows from Investing Activities :–
Ø
Purchase of fixed assets
Ø
Sale of fixed assets
Ø
Purchase of investments (long-term)
Ø
Sale of Investment (long-term)
Ø
Interest received
Ø
Dividend received
Net Cash from Investing Activities
(.............)
.............
(.............)
.............
.............
.............
________ .............
(C) Cash Flows from Financing Activities:
Ø
Ø
Ø
Ø
Ø
Proceeds from issue of share capital
Proceeds from long-term borrowings
Repayments of long-term borrowings
Interest paid
Dividend paid
Net Cash from Financing Activities
Net Increase or decrease in cash and cash
equivalents ( A+B+C)
Cash and cash equivalent at the beginning
of the period
Cash and Cash equivalent at the end
of the period
Q.
.............
.............
(.............)
(.............)
(.............)
_________ .............
________
.............
.............
________
.............
________
What is Cash Flow Statement. Discuss Its main Uses and
Limitations?
Ans. Cash Flow Statement :– A cash-flow statement is a statement showing
inflows and outflows of cash during a particular period. In other words, it is a
summary of sources and applications of cash during a particular span of time.
It analysis the reason for changes in balance of cash between the two balance
sheet dates. The term ‘cash’ here stands for cash and cash equivalents. A cashflow statement can be for the past or can be projected for a future period.
Uses of Cash Flow Statement :–
1.
Useful for short-term financial planning :– A cash flow statement
provides information for planning the short-term financial needs of the
firm. Since it provides information regarding the sources and utilization of
cash during a period, it becomes easier for the management to assess
whether it will have adequate cash to meet day-to-day expenses and pay
the creditors in time.
2.
Useful in preparing the Cash Budget :– A cash flow statement prepared
for the future period in helpful in preparing a cash budget. It informs the
management about the surplus or deficit periods of cash. It helps in
planning the investment of surplus cash in short-term investments and to
plan short-term credit in advance for deficit period.
3.
Study of the trend of cash receipts and payments :– A cash flow
statement reveals the speed at which the cash is being generated from
debtors, stock and other current assets and the speed at which the
current liabilities are being paid. It enables the management to assess the
true position of the cash in nature.
4.
It explains the deviation of cash from earnings :– A firm may earn huge
profits yet it may have paucity of cash or when it suffered a loss it may still
have plenty of cash. A cash flow statement explains the reasons for it.
5.
Helpful in making Dividend Decisions :– Dividend must be paid within
42 days of its declaration. Hence the management takes the help of cash
flow statement to ascertain the position of cash generated from operating
activities which can be used for payment of dividend.
6.
Study of the Trend of Cash Receipts and Payments :– A cash-flow
statement reveals the speed at which the cash is being generated from
debtors, stock and other current assets and the speed at which the
current liabilities are being paid. It enables the management to assess the
true position of the cash in future.
Limitations of Cash Flow Statement :–
1.
It does not present true picture of the liquidity of a firm because the
liquidity does not depend upon cash alone.
2.
The possibility of window-dressing is higher in case of cash position in
comparison to the working capital position of a firm.
3.
Cash flow statement ignores non-cash charges.
4.
It is prepared on cash basis and hence ignores one of the basis concepts of
accounting, namely accrual concept.
Q.
Distinction between Fund Flow Statement and Cash Flow Statement.
Ans. Distinction between Fund Flow Statement and Cash Flow Statement:
BASIS
FUND FLOW
STATEMENT
CASH FLOW
STATEMENT
1. Basis of
Analysis
It discloses the causes of
changes in working capital.
It discloses the
cause of changes
in cash position.
2. Interpretation
Sound funds position doesn’t
mean sound cash position
because inflow of funds
doesn’t necessarily involve
inflow of cash.
Sound cash position
means sound funds
position as inflow of
cash necessarily
involves inflow
of funds.
3. Difference in
the method of
preparation
In case of fund flow analysis,
an increase in a current
liability or decrease in a
current assets results in
decrease in working capital
& vice-versa.
In case of cash flow
analysis an
increase or
decrease in a
current assets
results in increase
in cash &
vice-versa.
4. Usefulness
It is more useful for long-term It is more useful for
financial planning.
short-term financial
planning.
5. Schedule of
Changes in
Working Capital
Schedule of changes in
working capital is also
preparing to study the
changes in current assets
and current liabilities.
No separate
schedule is
prepared with the
cash flow statement
as the changes in
current assets and
current liabilities
are shown by way of
adjustment in profit
to arrive at cash
flow from operating
activities.
6. Opening &
closing Balance
of Cash
Opening & closing balance
of cash are not shown in fund
flow statement, as they are
shown in schedule of changes
in working capital.
Opening & closing
balance of cash are
shown in this
statement
7. Principles of
Accounting
Q.
This is prepared on ‘accrual
basis’ of accounting
This is prepared on
‘cash basis’ of
accounting.
Distinction Between Fund Flow Statement And Income Statement Or
Profit And Loss Account.
Ans. Distinction Between Fund Flow Statement And Income Statement Or
Profit And Loss Account
BASIS
FUND FLOW STATEMENT
INCOME
STATEMENT
1. Nature
It discloses the sources and
uses of funds.
It discloses net
profit or net loss
made during
the year.
2. Items
All items whether capital or
revenues are considered in
preparing this statement.
For Example:- Cash received
from shares issue is
considered a source of funds
Only revenue items
are considered in
this statement.
For Example:- Cash
received from share
issue is not
considered an
income.
3. Objects
It helps in the financial
management of the business
It is prepared to
ascertain the net
results of business
operations.
4. Optional or
Compulsory
Preparation of fund flow
statement is optional and if it
is prepared, it can be one so
in any manner.
Preparation of
income statement is
compulsory and the
contents of income
statement must be
in accordance with
requirements of law.
5. Help
Income statements help the
preparation of funds flow
statement because funds from
operations are found out from
income statement.
Funds flow
statement doesn’t
help the
preparation of
income statement.
6. Scope
Q.
Its scope is limited because it
only shows changes in
working capital, i.e. sources
and uses of funds.
It is of utmost
important because
it depicts the result
of all financial
transactions of a
particular period.
Distinction Between Fund Flow Statement And Balance Sheet.
Ans. Distinction Between Fund Flow Statement And Balance sheet:
BASIS
FUND FLOW STATEMENT
BALANCE SHEET
1. Nature
It discloses the sources and
uses of funds
It is a statement of
assets and liabilities
at appoint of time.
2. Items
All items whether capital or
revenues are considered in
preparing this statement.
Only the items of
assets, liabilities
and capital are
considered in
preparing this
statement.
3. Use
It is a tool of management
techniques and is used by the
management for future
financial planning and budget
formation.
Not only the
management but
some external
parties are also
interested in it
because it is
prepared to reveal
the financial
position of the firm.
4.Optional or
Compulsory
Preparation and publication of
fund flow statement is optional
and if it is prepared, it can be
done in so in any form.
Preparation and
publication of
Balance Sheet is
compulsory and it
is prepared in its
prescribed form.
5. Basis of
preparation
It is prepared with the help of It is prepared with
two balance sheet and profit & the help of trial
loss A/c.
balance.
6. Scope
Its scope is limited because it
only shows changes in
working capital, i.e. sources
and uses of funds.
It is so important
because it shows
the financial
position of the
business.
7. Term
It is prepared to know the
temporary changes
It is an yearly affair
throughout the
whole life of the
business.
Q.
What is Fund Flow Statement? How is it prepared?
Ans. Meaning of Fund Flow Statement :– The balance sheet of a firm discloses
the position of assets, liabilities and capital at the end of a particular year. But
it does not disclose the causes of changes in these items between the end of
previous year and the end of current year. Therefore, an additional statement
called ‘Fund Flow Statement’ is prepared to show the changes in assets,
liabilities and capital between the dates of two balance sheets.
Meaning of Funds :– In a limited sense, the term ‘fund’ means ‘cash’. But this
is not the correct meaning of the term ‘fund’ because there are many
transactions in the business which do not result in inflow or outflow of cash but
certainly result in the inflow or outflow of funds. As such, the term ‘fund’ stands
for ‘Net Working Capital”.
Meaning of Flow :– The term ‘flow’ means change or movement. Therefore, the
term ‘Flow of Funds’ means increase or decrease in working capital. If a
transaction results in the increase of working capital, it is said to be a source of
funds and if the transaction results in the decrease of working capital, it is said
to be an application of funds. If the transaction does not result in any change in
the working capital, it is said that it does not result in the flow of fund.
Preparation of Fund Flow Statement :– For preparing Fund Flow Statement
we have to prepare the following three statements:
(1)
Schedule of Changes in Working Capital :– This schedule considers only
current assets and current liabilities, at the beginning and at the end of
the year. This schedule shows either increase or decrease in working
capital.
SCHEDULE OF CHANGES IN WORKING CAPITAL
Particulars
Current Assets:
Ø Cash-in-hand
Ø Cash at Bank
Ø Debtors
Ø Closing Stock
Ø Short Term
investments
Ø Bills Receivables
Ø Prepaid Expenses
Ø Other current assets
Amount
As on
………..
Amount
As on
………..
________
________
Increase in
Working
Capital
Decrease in
Working
Capital
Total Current Assets
Current Liabilities:
Ø Bank Overdraft
Ø Bills Payable
Ø Creditors
Ø Provision for Taxation
Ø Proposed Dividend
Ø O/s Expenses
Ø Unclaimed Dividend
________
________
________
________
Total Current Liabilities
________
________
________
________
Working Capital (Current
Assets –Current Liabilities)
Net Increase or Decrease
in Working Capital
(2) Calculation of Funds from Operations :– In order to prepare a funds
flow statement it is necessary to ascertain the sources and application of
funds. Main source of fund in a business is funds from operations
STATEMENT SHOWING ‘FUNDS FROM OPERATIONS’
Particulars
Net Profit As per Profit & Loss A/c
(A) Items to be Added back to Net Profit:
(a) Non-Fund Items:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(b)
Depreciation.
Goodwill written off.
Preliminary Expenses.
Patent Rights, Trade Marks and Copy Rights.
Discount on issue of Debentures & Shares.
Deferred Revenue Expenditure such as,
Advertisement Suspense A/c.
Non- Trading Losses:
(i) Loss on sale of Fixed Assets
(ii) Appropriation of Profit:
Transfer to General Reserve
Transfer to Sinking Fund
Transfer to Dividend
Equalisation Fund etc.
(i) Proposed Dividend
Amount
(ii)
Provision for Taxation
(B) Items to be Deducted from Net Profit
(i) Profit on sale of Fixed Assets
(ii) Receipt of Dividend
(iii) Re-Transfer of Excess Provisions
Ø
Fund Flow Statement :– Fund Flow Statement is prepared to show the
changes in assets, liabilities and capital between the dates of two balance
sheets. It discloses the causes of changes in the items of balance sheet
between the end of the previous year and the end of current year. Thus, by
preparing this statement, the management can find out the basic reasons
for changes in the assets, liabilities and capital of the firm between two
balance sheets.
FORMAT OF FUND FLOW STATEMENT :–
FUND FLOW STATEMENT
Sources of Funds
Applications of Funds
1.
Funds from Operations
1. Loss from Operations
2.
Issue of Shares
2. Buy back of Equity shares and
Redemption of Preference Shares
Q.
3.
Issue of Debentures
3. Redemption of Debentures
4.
Raising Long-Term Loans
4. Repayment of Long-Term Loans
5.
Sale of Fixed Assets
5. Purchase of Fixed Assets
6.
Non-Trading Receipts
6. Non-Trading Payments
What is Fund Flow Statement? What are the uses and Limitations of
Fund Flow Statement?
Ans. Meaning of Fund Flow Statement :– The balance sheet of a firm discloses
the position of assets, liabilities and capital at the end of a particular year. But
it does not disclose the causes of changes in these items between the end of
previous year and the end of current year. Therefore, an additional statement
called ‘Fund Flow Statement’ is prepared to show the changes in assets,
liabilities and capital between the dates of two balance sheets.
Uses of Fund Flow Statement :–
1.
Helpful in Finding the Answers to Some Important Financial
Questions :– A fund flow statement is prepared to give satisfactory answer
to the following questions:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
What have been the main sources and applications of funds during
the period?
How much funds have been generated from business operations?
Where did the profits go?
Why are dividends not larger?
How was the expansion in plant and Equipment financed?
How was the repayment of long term debt accomplished?
How was the increase in Working Capital financed?
2.
Helpful in Financial Analysis :– A fund flow statement provides a
complete analysis of the financial position of a firm. This objective is not
achieved by the balance sheet because it gives a static view of the financial
position of a business by showing the assets and liabilities at a particular
point of time.
3.
It provides more reliable figures of profit and loss of the business :– A
fund flow statement gives a much more reliable figure of the profits of the
business than the figures shown by profit and loss account is affected by
the personal decisions of management in deciding the amount of
depreciation and other adjustments regarding the writing off of
preliminary expenses etc.
4.
It enables to know whether the funds have been properly used :– The
fund 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.
Help in the presentation of Budget for the next period :– If 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.
Helpful in Determining Dividend Policy :– Sometimes, there may be
sufficient profits but the distribution may not be possible due to its
adverse effect on the liquidity and working capital of the business.
Limitations of Fund Flow Statement :–
1.
Fund flow statement ignores certain non-fund transactions.
2.
It reveals only the changes in working capital and does not show the
changes in cash position.
3.
It is historical in nature because it reports what has happened in the past.
4.
Since it is based on opening and closing balance sheets and the profit and
loss account, it is not an original statement.
Q.
What is Cash Flow Statement? Give the Format of Cash Flow
Statement Or How is it prepared?
Ans. Cash Flow Statement :– A cash-flow statement is a statement showing
inflows and outflows of cash during a particular period. In other words, it is a
summary of sources and applications of cash during a particular span of time.
It analyss the reason for changes in balance of cash between the two balance
sheet dates. The term ‘cash’ here stands for cash and cash equivalents. A cashflow statement can be for the past or can be projected for a future period.
FORMAT OF CASH FLOW STATEMENT :– A cash flow statement may be
prepared either by direct or indirect method. Format under indirect method is
given below:
XYZ LTD.
CASH FLOW STATEMENT for the year ending………………
(Indirect Method)
Particulars
Amount
(A) Cash Flows from Operating Activities :–
Net profit before Tax
Add : Non-Cash Expenses
: Non-operating Expenses
.............
.............
.............
Operating Profit before Working Capital Changes
________
Add : Decrease in Current Assets
: Increase in Current Liabilities
.............
.............
________
(.............)
(.............)
________
.............
(.............)
Less : Increase in Current Assets
: Decrease in Current Liabilities
Cash generated from operating activities
Income Tax paid
Amount
Cash flows before extraordinary items
(+) or (-) Extraordinary items
________
.............
.............
Net Cash from Operating Activities
________
.............
(B) Cash Flows from Investing Activities :–
Ø
Purchase of fixed assets
Ø
Sale of fixed assets
Ø
Purchase of investments (long-term)
Ø
Sale of Investment (long-term)
Ø
Interest received
Ø
Dividend received
Net Cash from Investing Activities
(.............)
.............
(.............)
.............
.............
.............
________ .............
(C) Cash Flows from Financing Activities:
Ø
Ø
Ø
Ø
Ø
Proceeds from issue of share capital
Proceeds from long-term borrowings
Repayments of long-term borrowings
Interest paid
Dividend paid
Net Cash from Financing Activities
Net Increase or decrease in cash and cash
equivalents ( A+B+C)
Cash and cash equivalent at the beginning
of the period
Cash and Cash equivalent at the end
of the period
Q.
.............
.............
(.............)
(.............)
(.............)
_________ .............
________
.............
.............
________
.............
________
What is Cash Flow Statement. Discuss Its main Uses and
Limitations?
Ans. Cash Flow Statement :– A cash-flow statement is a statement showing
inflows and outflows of cash during a particular period. In other words, it is a
summary of sources and applications of cash during a particular span of time.
It analysis the reason for changes in balance of cash between the two balance
sheet dates. The term ‘cash’ here stands for cash and cash equivalents. A cashflow statement can be for the past or can be projected for a future period.
Uses of Cash Flow Statement :–
1.
Useful for short-term financial planning :– A cash flow statement
provides information for planning the short-term financial needs of the
firm. Since it provides information regarding the sources and utilization of
cash during a period, it becomes easier for the management to assess
whether it will have adequate cash to meet day-to-day expenses and pay
the creditors in time.
2.
Useful in preparing the Cash Budget :– A cash flow statement prepared
for the future period in helpful in preparing a cash budget. It informs the
management about the surplus or deficit periods of cash. It helps in
planning the investment of surplus cash in short-term investments and to
plan short-term credit in advance for deficit period.
3.
Study of the trend of cash receipts and payments :– A cash flow
statement reveals the speed at which the cash is being generated from
debtors, stock and other current assets and the speed at which the
current liabilities are being paid. It enables the management to assess the
true position of the cash in nature.
4.
It explains the deviation of cash from earnings :– A firm may earn huge
profits yet it may have paucity of cash or when it suffered a loss it may still
have plenty of cash. A cash flow statement explains the reasons for it.
5.
Helpful in making Dividend Decisions :– Dividend must be paid within
42 days of its declaration. Hence the management takes the help of cash
flow statement to ascertain the position of cash generated from operating
activities which can be used for payment of dividend.
6.
Study of the Trend of Cash Receipts and Payments :– A cash-flow
statement reveals the speed at which the cash is being generated from
debtors, stock and other current assets and the speed at which the
current liabilities are being paid. It enables the management to assess the
true position of the cash in future.
Limitations of Cash Flow Statement :–
1.
It does not present true picture of the liquidity of a firm because the
liquidity does not depend upon cash alone.
2.
The possibility of window-dressing is higher in case of cash position in
comparison to the working capital position of a firm.
3.
Cash flow statement ignores non-cash charges.
4.
It is prepared on cash basis and hence ignores one of the basis concepts of
accounting, namely accrual concept.
Q.
Distinction between Fund Flow Statement and Cash Flow Statement.
Ans. Distinction between Fund Flow Statement and Cash Flow Statement:
BASIS
FUND FLOW
STATEMENT
CASH FLOW
STATEMENT
1. Basis of
Analysis
It discloses the causes of
changes in working capital.
It discloses the
cause of changes
in cash position.
2. Interpretation
Sound funds position doesn’t
mean sound cash position
because inflow of funds
doesn’t necessarily involve
inflow of cash.
Sound cash position
means sound funds
position as inflow of
cash necessarily
involves inflow
of funds.
3. Difference in
the method of
preparation
In case of fund flow analysis,
an increase in a current
liability or decrease in a
current assets results in
decrease in working capital
& vice-versa.
In case of cash flow
analysis an
increase or
decrease in a
current assets
results in increase
in cash &
vice-versa.
4. Usefulness
It is more useful for long-term It is more useful for
financial planning.
short-term financial
planning.
5. Schedule of
Changes in
Working Capital
Schedule of changes in
working capital is also
preparing to study the
changes in current assets
and current liabilities.
No separate
schedule is
prepared with the
cash flow statement
as the changes in
current assets and
current liabilities
are shown by way of
adjustment in profit
to arrive at cash
flow from operating
activities.
6. Opening &
closing Balance
of Cash
Opening & closing balance
of cash are not shown in fund
flow statement, as they are
shown in schedule of changes
in working capital.
Opening & closing
balance of cash are
shown in this
statement
7. Principles of
Accounting
Q.
This is prepared on ‘accrual
basis’ of accounting
This is prepared on
‘cash basis’ of
accounting.
Distinction Between Fund Flow Statement And Income Statement Or
Profit And Loss Account.
Ans. Distinction Between Fund Flow Statement And Income Statement Or
Profit And Loss Account
BASIS
FUND FLOW STATEMENT
INCOME
STATEMENT
1. Nature
It discloses the sources and
uses of funds.
It discloses net
profit or net loss
made during
the year.
2. Items
All items whether capital or
revenues are considered in
preparing this statement.
For Example:- Cash received
from shares issue is
considered a source of funds
Only revenue items
are considered in
this statement.
For Example:- Cash
received from share
issue is not
considered an
income.
3. Objects
It helps in the financial
management of the business
It is prepared to
ascertain the net
results of business
operations.
4. Optional or
Compulsory
Preparation of fund flow
statement is optional and if it
is prepared, it can be one so
in any manner.
Preparation of
income statement is
compulsory and the
contents of income
statement must be
in accordance with
requirements of law.
5. Help
Income statements help the
preparation of funds flow
statement because funds from
operations are found out from
income statement.
Funds flow
statement doesn’t
help the
preparation of
income statement.
6. Scope
Q.
Its scope is limited because it
only shows changes in
working capital, i.e. sources
and uses of funds.
It is of utmost
important because
it depicts the result
of all financial
transactions of a
particular period.
Distinction Between Fund Flow Statement And Balance Sheet.
Ans. Distinction Between Fund Flow Statement And Balance sheet:
BASIS
FUND FLOW STATEMENT
BALANCE SHEET
1. Nature
It discloses the sources and
uses of funds
It is a statement of
assets and liabilities
at appoint of time.
2. Items
All items whether capital or
revenues are considered in
preparing this statement.
Only the items of
assets, liabilities
and capital are
considered in
preparing this
statement.
3. Use
It is a tool of management
techniques and is used by the
management for future
financial planning and budget
formation.
Not only the
management but
some external
parties are also
interested in it
because it is
prepared to reveal
the financial
position of the firm.
4.Optional or
Compulsory
Preparation and publication of
fund flow statement is optional
and if it is prepared, it can be
done in so in any form.
Preparation and
publication of
Balance Sheet is
compulsory and it
is prepared in its
prescribed form.
5. Basis of
preparation
It is prepared with the help of It is prepared with
two balance sheet and profit & the help of trial
loss A/c.
balance.
6. Scope
Its scope is limited because it
only shows changes in
working capital, i.e. sources
and uses of funds.
It is so important
because it shows
the financial
position of the
business.
7. Term
It is prepared to know the
temporary changes
It is an yearly affair
throughout the
whole life of the
business.
