Chapter 8 Fund Flow Statement
Statements of changes in Financial Position -
The statement of changes in financial position, often referred to as the fund flow statement, describes the financing and investment activities of a business enterprise. Funds are defined in one of two ways -
i) Funds are defined as cash.
ii) Funds are defined as working capital
Funds are defined as cash:
The statement of changes explains the amount of cash that various financing activities provided, the cash used for various investing activities and the resulting change in the cash balance from the beginning of the accounting period to the end, as shown in balance sheets The statement of changes with funds defined as cash is of interest primarily to informal managers. Managers use information on day-to-day operations of the business and must manage the flow of cash carefully to monitor current operations and control the flow of current assets and liabilities. They must have detailed information as each component of working capital, including cash.
Funds are defined as working capital
When funds are defined as working capital, the statement of changes explains how much working capital the financing and investing activities provided and used, and how working capital changed from the beginning of the accounting period to the end of the accounting period.
Funds are usually defined as working capital in statements prepared for external users e.g. investors, shareholders; financial analysts are usually not interested in the detailed operations that are disclosed by cash flow information. They need a broad view of fund flows to ascertain the general well being of the company and its activity to generate funds.
Sources and Uses of Funds -
There are four types of financing activities that provide funds: - The primary sources of funds for majority of business are from operations. 1. Capital contributed by the owners during the accounting period. 2. Borrowing from financial institutions and banks or from the public. 3. The primary sources of funds for majority of business are from operations. 4. The sale of Fixed assets, investments, which are normally held not for sale. 5. Reduction in working capital
There are four types of investing activities that require the use of funds. They are: - 1. The acquisition of fixed assets in order to expand the business. 2. Repayment of loan to lenders.
3. Reduction in share capital.
4. Increase in working capital
What is Flow of Fund - (When funds are defined as Working Capital)?
Flow of fund is said to have taken place when a business transaction makes a change in the amount of fund that existed before the happening of the transaction. If the change results in an increase in fund then the transaction responsible for such a change is said to be a source of fund. If the change results in the decrease of fund then the transaction result in an application or a use of fund. If the transaction does not change the fund, the transaction does not result in the ‘flow of fund’.
To know whether the transaction has resulted in a flow of fund the following procedure needs to be adopted: -
a) Understand the effect of the transaction i.e. at the back of the fund make a formal entry of the transaction. b) Find out which category of-accounts are involved in the transaction i.e. current assets, current liabilities, non-current assets or non-Current liabilities. c) If it is found that all the accounts involved in the transaction belong to “Current” category then the transaction does not result in the flow of fund. If it is found that all the accounts involved in the transaction belong to “Non-current” category, then too the transaction does not result in the flow of fund. d) If it is found that an account belongs to Current Category and another to Non-current category, then the transaction results in the flow of fund.
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