Question

Discuss the meaning of Fund Flow Statement.

Hint:

Fund Flow = Movement of Financial Resources; Cash Flow = Movement of Cash. Both are essential for financial planning and control.

Answer 1

Step 1: Definition.
A Fund Flow Statement is a financial report that explains the changes in a company’s financial position between two accounting periods.
It shows how funds were generated (sources of funds) and how those funds were used (application of funds) during the period.
Step 2: Explanation.
The statement is prepared to identify the movement of working capital and understand whether the business is generating or consuming funds.
It differs from a cash flow statement because it focuses on long-term funds rather than only cash transactions.
Step 3: Components of Fund Flow Statement.
1. Sources of Funds:
- Issue of shares or debentures
- Long-term loans raised
- Sale of fixed assets
- Operating profits retained in the business
2. Application (Uses) of Funds:
- Purchase of fixed assets
- Repayment of loans
- Payment of dividends or taxes
- Increase in working capital
Step 4: Importance.
- It helps management analyze how efficiently funds are utilized.
- It assists investors and creditors in evaluating financial health.
- It aids in planning future financial strategies by revealing the pattern of fund movements.
Step 5: Difference from Cash Flow Statement.
While a cash flow statement focuses on actual cash inflows and outflows, a fund flow statement captures all financial resources, including non-cash items like depreciation and working capital changes.
Step 6: Conclusion.
Thus, a Fund Flow Statement is an essential tool of financial analysis that provides insights into the sources and applications of funds, helping management maintain a sound financial balance.