Funds flow statement shows the changes in the financial position between two balance sheet dates. It represents the movement of funds and the movement can be inward called as income or receipts. In case of outward movement, it is represented by expenditure or payments.
The term, "funds" has different meanings. In the context of funds flow statement "funds" means the net working capital. Flow of funds means changes in funds position of changes in working capital. Working capital refers to that part of capital which is required for meeting the needs of current operations. There are two concepts of working capital, namely gross working capital and net working capital.
Gross working capital refers to total investment in current assets. Net working capital means of excess of current assets over current liabilities. Transactions involving a fixed asset/liability on the one hand and a current asset/liability on the other hand result in changes in working capital. Transactions within the same category will not result in change in working capital.
A funds flow statement is a statement which explains the various sources from which funds were raised and the uses to which these funds were put. There are three steps involved in the preparation of funds flow statement. They are i) preparation of schedule of changes in working capital 2) calculation of funds from operation and 3) preparation of funds flow statement. While preparing schedule of changes in working capital, we have to take only current items viz., current assets and current liabilities; and while calculating funds from operations we have to initially arrive at the net profit/loss. Afterwards we have to adjust the items which do not involve outflow of funds and the items which are already debited to profit and loss account. Non fund or non operating items which have already been credited to profit and loss account must also to be adjusted. Funds flow statement shows the sources from which additional...
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