Question

The term ‘Fund’ as used in Fund Flow Analysis means

• A. Cash only
• B. Current assets
• C. Current liabilities
• D. Excess of current assets over current liabilities

Hint:

In Fund Flow Analysis, always remember: Fund = Net Working Capital = Current Assets – Current Liabilities.

Answer 1

The Correct Option is D

Step 1: Understanding the meaning of ‘Fund’.
In the context of Fund Flow Analysis, the term ‘Fund’ does not refer merely to cash or money.
Instead, it denotes the Net Working Capital (NWC), which represents the excess of current assets over current liabilities.
This concept helps in identifying the flow of funds — whether the working capital has increased (inflow) or decreased (outflow).
Step 2: Relationship between fund and working capital.
Working capital = Current Assets – Current Liabilities.
If current assets increase or current liabilities decrease, it results in an inflow of funds.
Conversely, if current assets decrease or current liabilities increase, it indicates an outflow of funds.
Step 3: Importance in Fund Flow Analysis.
Fund Flow Analysis focuses on understanding how resources are generated and used within an organization over a given period.
By analyzing the changes in working capital, businesses can evaluate their short-term financial health and liquidity position.
Step 4: Analysis of options.
- (1) Cash only: Incorrect — fund means more than just cash.
- (2) Current assets: Incomplete — fund is not equal to all current assets alone.
- (3) Current liabilities: Incorrect — liabilities represent obligations, not fund.
- (4) Excess of current assets over current liabilities: Correct — this is the actual definition of fund in Fund Flow Analysis.
Step 5: Conclusion.
Thus, in Fund Flow Analysis, the term ‘Fund’ refers to the excess of current assets over current liabilities.