What is Fund Flow Statement? Meaning, Definition, Uses & Objectives

As balance sheet and income statement provides only limited information, it is necessary to prepare a statement which shows the changes in both assets and liabilities of the firm during a specified period of time. Such a statement is known as a funds flow statement or statement of sources and application of funds or statement showing the position/movement of working capital. Thus, with the help of fund flow statement, financial analyst can make appropriate estimation about the financial position and policies of the firm.

Fund flow statement possess the following features,

1. It is a dynamic representation of an enterprise over a period of time.
2. It acts as a link between the two successive balance sheets, thereby maintaining the relationship between the two.
3. It represents cash inflows and outflows in a specified manner.
4. It acts as a separate statement which is not a part of double entry system of accounts.
5. It is prepared on yearly basis.

Importance/Uses/Significance/Advantages of Fund Flow Statement

The significance of fund flow statement can be easily understood from the following points,

1. Analysis of Financial Operations

Balance sheet gives a static view of resources and does not reveal the reasons for changing the assets and liabilities at different points of time. In this situation funds flow statement is useful as it explains the reasons for changes and the impact of such changes on the liquidity position of the company.

2. Evaluates Use of Working Capital

The funds flow statement enables the management in understanding the effective utilization of working capital and also the adoption of different methods for improving the working capital position of a firm.

3. Future Guide

The forecasted funds flow statement acts as a future guide for the management. Funds flow statement is useful in identifying the problems relating to funds which may arise in future. Depending on such fore castings, firm can make arrangement which helps them either in overcoming or reducing the frequency of occurrence of such problems.

4. Proper Allocation of Resources

As there is an availability of limited resources with the firm, it is necessary to make best use of it. A firm prepares a forecasted funds flow statement for future which helps in decision-making, planning the optimal allocation and utilization of resources.

5. Solves Complicated Questions

Funds flow statement helps in solving complicated questions which is a very difficult task. These questions were related with the sources of repayment of debt, net profit, sources of financing the Marking capital, distribution of dividends and so on.

Limitations of Fund Flow Statement

Funds flow statement is useful in many ways but it is also associated with certain limitations. Some of them include,

1. It does not acts as a substitute for an income statement or balance sheet as it only explains about the working capital position of the business but doesn’t give any idea about the amount of earnings or profits of a firm.
2. It does not give any information about the actual profits gained by the organization.
3. As funds flow statements are historical in nature it is not possible to prepare accurate projected funds flow statement as the same historical limitations are also carried forward in future.
4. It is not possible for funds flow statement to disclose continuous changes encountered in an organization.
5. Funds flow statement is prepared based on the information of balance sheet and income statement. But this statement is also subjected to certain further limitations such as,

(i) It reveals only monetary transactions.

(ii) It depends on accounting concepts and conventions.

(iii) It is historical in nature, unless projected funds flow statement is prepared to plan for the future, it is not of much use.

Need/Purpose of Fund Flow Statement

Funds flow statement/analysis or statement of changes in the financial position of a firm serves the following purposes:

1. It helps the investors to determine the most significant factors which are responsible for facilitating changes in financial position
2. It helps to identify internal factors (i.e. internal operations) and external sources through which changes has been made.
3. It helps to focus on the factors that are responsible for estimating the differences in equity assets and liabilities.
4. It IS useful to emphasize the changes which took place in the investment assets.
5. It also depicts the changes which have been made while collecting funds for investing in business.

Objectives of Fund Flow Statement

The main objectives of funds flow statement or analysis are as follows:

1. To represents the changes in the financial position of a firm during the accounting period.
2. To estimate and measure the funds generated or depleted through internal operations.
3. To determine the various sources from which the funds can be collected and also the different strategies the help of which such funds can be utilized.
4. To disclose hidden information which is not clear either in profit and loss account or in balance sheet.
5. To represent the effect of entire transactions on the working capital of enterprise during the accounting period.