2. What are the characteristics of Fund flow statement and its uses?
What do the financial forecast and sources and uses of funds statement of company tell us?
Discuss about breakeven analysis. What does the breakeven chart of the company tell us?
Fund Flow Statement
Financial statements mainly include profit and loss account and balance sheet. Profit and loss account lists out all the expenses made by the firm and revenue earned over a period of time. Balance sheet depicts the financial position of the firm at a particular point of time. While fund flow statement is complimentary to both balance sheet and profit and loss account, it brings a clear idea about the movement of funds in and out of the firm, during a particular period of time.
Meaning of Fund Flow
The financial statement of the business indicates assets, liabilities and capital on a particular date and also the profit or loss during a period. But it is possible that there is enough profit in the business and the financial position is also good and still there may be deficiency of cash or of working capital in business. If the management wants to find out as to where the cash is being utilized, financial statement cannot help. Therefore, a statement is prepared of the sources and applications of funds from where Working Capital comes and it is utilized. This is called Fund Flow statement. Meaning of ‘Fund’
In a popular and generally accepted sense the term ‘fund’ is used to denote the excess of current assets over current liabilities : Working Capital = Current Assets – Current Liabilities Meaning of ‘Flow’ of Fund
Flow of funds means transmigration (coming and going) of funds. In other words, Flow of funds means change in Working capital, as in funds flow statement the words ‘funds’ mean net working capital. Hence Coleman rightly states that, “The fund statement is statement summarizing the significant financial changes which have occurred between the beginning and the end of a company’s accounting period.”
The flow of fund if is represented by changes in working capital, then it can happen, only if a transaction involves changes on both current item and noncurrent item. Every transaction has double entry. Various cases can be that transaction involves
➢ Change on current assets and on fixed assets (cash purchase of fixed assets) o Cash being current item and fixed assets are non current ➢ Change on current assets and on current assets (credit sale of inventory) o Debtors is a current item and inventory is also current in nature ➢ Change on current assets and change on current liabilities (payment made to creditors) o Cash is current asset and creditor, current liability ➢ Change on current liabilities and change on current liabilities (short term loan taken to clear overdraft) ➢ Change on fixed assets and on fixed liabilities (sale of investments to redeem debentures)
So, amongst all these combinations, transactions which involve change, on one hand on current item and on other hand on non current item, they would only lead to fund flow.
E.g.* Sell investments in cash.
* Issue of shares
* Raising long term loans, etc.
Thus fund flow statement enumerates various sources from which funds come in organization and various applications which lead to usage of funds. It is an important tool to check the efficiency of management in the firm. It can make future projections about working capital requirements and thus firm can arrange for those requirements and can allocate funds in a more efficient manner.
Preparation of fund flow statement involves preparation of adjusted profit and loss account which is prepared by excluding the non fund and non operating items from the initial figure of net profit.
Different Names of Fund-flow Statement
* A Funds Statement
* A statement of sources...