Fund Flow Analysis

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FUND FLOW ANALYSIS

Every business concern, at the end of its financial period, prepares Income Statements and Balance Sheet. Income Statements show the net result, Net Profit, of the business operations and contains various expenses incurred and losses and revenue earned during that period. Balance Sheet gives a summary of assets and liabilities as on a particular date and shows the financial position of the business. The liabilities side of a balance sheet shows the sources from where funds are raised and the assets side shows how the funds raised are utilized. But it does not show the causes or reasons for changes in assets and liabilities, flow of funds, between two balance sheet dates. Therefore, a statement is prepared in addition to the Income Statements and Balance Sheet, to show changes in assets and liabilities between two balance sheet dates, which is known as Fund Flow Statement. It is a statement, also known as Statement of Changes in Financial Position, designed to analyse the changes in financial condition of a concern between to specified dates.
The Term “Fund”
The term “Fund” can be explained in many ways. In the narrow sense, it means cash only. Transactions involving cash receipts and payments are considered in this approach. In the broader sense, fund means working capital, which is the excess of current assets over current liabilities. For fund flow analysis, the broader approach, working capital approach, is considered.
The word “Flow” means change and “fund flow” means change in funds or change in working capital. Any increase or decrease in working capital is flow of funds. Flow of funds may be either inflow of funds or outflow of funds. Inflow refers to sources of funds and outflow refers to applications of funds. If a transaction brings any change in working capital, flow of funds takes place. This will happen when changes occurs in the values of fixed assets, share capital, long term debts etc. with the

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