Funds flow statement may be a statement prepared to analyze the explanations for changes within the financial position of a corporation between two balance sheets. It portrays the inflow and outflow of funds i.e. sources of funds and applications of funds for a specific period.
A fund flow statement is beneficial in knowing the changes within the structure of assets, liabilities, and capital. It shows whether the sources of funds coincides with its application and indicates the accuracy of a firm’s financing and investment decisions. Unlike the income statement, which is ready on accounting, the fund’s flow statement is ready on an accounting.
Benefits of Funds Flow Statement
Funds Flow Statement is beneficial for future Analysis. It’s a really useful gizmo within the hands of the management for judging the financial and operating performance of the corporate. The record and therefore the Profit and Loss A/c (Income Statement) fails to supply the knowledge which has provided by the Funds Flow Statement. Changes in Financial Position of an enterprise. Such an analysis is of great help to the management, shareholders, etc
Preparation of Fund Flow Statement
Step 1: Preparation of Statement of Changes in Working Capital:- Statement of Changes in the capital may be a summary that shows internet increase or decrease within the capital of the business.
The capital of the firm increases if there’s a rise within the current assets or a decrease within the current liabilities. However, the capital of the firm decreases if there’s a decrease within the current assets and a rise within the current liabilities.
Further, there’ll be no change within the capital if there’s a realization from debtors or bills receivable or payment made to creditors or bills payable, goods are sold on credit, and goods are purchased on credit.
Step 2: Determination of Funds from Operations:- Funds from operations refers to the profit earned or loss incurred from the regular business operation. The ascertainment of funds from the operation is significant for the preparation of the fund flow statement.
Step 3: Preparation of Fund Flow Statement:- After recognizing the funds/loss from operations, the fund flow statement is ready. Which can show the internet increase or decrease within the capital.
Users of fund flow Statement
The most interested users of fund flow statements are the lenders of capital. They pay more attention to the fund Flow Statements than the Profit and Loss and record.
For Example, Bankers who lend money to the corporate as Overdraft or Cash Credit reciprocally for interest. The bankers use the knowledge provided by the corporate in its profit and loss statement and record in preparing a fund flow statement. Which then enables them to require decisions as to whether to supply its overdraft or cash credit facilities to its clients or not.
In this way, the Cash flow statement plays an important role in business is one of the foremost important business tools of deciding. Stay connected for more interesting articles. Be happy to share your feedback.