The balance sheet and income statement are traditional basic finance statements.

These statements have serious limitations. As such these do not provide any information the changes in the financial position of a firm. For example, by observing two consecutive balance sheets we may observe that there is a rise of investment in plant and machinery but we cannot determine from these two consecutive balance sheets the source of investment that financed these assets, as either from long term sources or from short term sources. Similarly, for many questions like working capital position funds generated from operations etc., these traditional statements fail to answer. The statement of changes in financial position or the funds flow statement is one which summarizes the sources from which the funds have been obtained and the uses to which they have been applied. The term funds can be defined as either total funds or cash or working capital. So the changes in financial position can be based on (1) Total resource basis (2) Working capital (3) Cash. Funds Flow Statements are prepared based on the finance statements for two successive or more periods. Funds Flow statement Total Resources Basis: The preparation of the funds flow statements on total resources basis involves comparison of the successive balance sheets and changes in each balance sheet item is noted and classified as a source of fund or a use of fund. For example, equity capital, increase in equity capital between two successive balance sheets implies there is an inflow of capital which is a source. If a company involves in purchasing of machinery (increase in fixed assets) then there will be outflow of capital this is classified as uses of funds. Accordingly various sources and uses of funds on total resource basis is shown in the table below. Sources and Uses of Funds on Total Resource Basis: Sources 1. Operations Profit after tax Depreciation, Good will written off, amortization and other non-cash expenses 2. Increase in equity capital 3. Decrease in assets 4. Increase in liabilities. Uses 1. Decrease in owners equity 2. Increase in assets 3. Decrease in liabilities. Non Cash Expenses: These are the expenses incurred but do not involve outflow of cash. Funds Flow statement Working Capital Basis

The funds flow statement, on working capital basis, presents (1) the source of working capital. (2) The use of working capital (3) the net change in working capital. Various sources and uses of working capital shown in the table below Net change in working capital = Uses of working capital Sources of working capital Sources and Uses of Funds on working Capital Basis: Sources 1. Funds from operations 2. sales of non-current assets 3. Long term financing (i) Long term borrowings (loans/bonds etc) (ii) Issuance of equity and preference shares. Uses: 1. Purchase of non-current assets 2. Repayment of long term and short term debt 3. Payment of cash dividends Funds Flow Statement cash Basis The funds flow statement, on cash basis, shows (1) the sources of cash (2) the uses of cash (3) the net change in cash. The sources of cash are the sources of working capital plus changes within the working capital account which augments the cash resources of the business. The uses of cash again are the changes which use working capital plus changes within the working capital account which deplete the cash resources of the business. These latter changes are simply the increase in current assets other than cash. The sources and uses of cash are shown below. Net change in cash = Sources of cash Uses of cash. Sources and Uses of Funds on cash Basis: Sources 1. Profits from operations 2. Decrease in any asset (other from cash) 3. Increase in liabilities 4. Issue of shares Uses 1. Loss from operation 2. Increase in any asset (other from cash) 3. Decrease in liability 4. Payment of cash dividends The main difference between the working capital basis and the cash basis is that, working capital basis treats increase in inventories and accounts receivable as equivalent to increase in cash. But in statement on cash basis it summarizes only the cash inflows and outflows over a period of time and as the cash from inventory is realized after a period, inventory is not treated as a source of cash. So, you can understand the difference of meaning of fund in working capital basis and in cash basis.

3. Net working capital -Net working capital means difference between current asset and current liabilities .funds generally refers to cash or cash equivalent or to working capital.
MEANING OF FLOW 1.The term flow refers to changes or transfer and therefore the flow of funds means transfer of economic values from one asset to another, from one liability to another, from one asset to liabilities or vice-versa or a combination of these. So flow of fund refers to increase or decrease in net working capital. 2.The increase or decrease in net working capital will take place only when one account, out of two accounts to be affected in a transaction ,is a current account i.e. current asset or current liabilities and the other account is non current account i.e. fixed asset or long term liability or capital. 3.When a change in non current account is followed by a change in another non current account, it does not amount to flow of fund. It is because, in such case, neither the working capital increase nor decrease.

In the above figure the dotted line displays there will be no flow of fund & the dark line displays the flow of fund.

Benefits of Fund flow Statement

The utility of this statement can be measured on the basis of its contributions to the financial management. It generally serves the following purposes:(1) Analysis of Financial Position:The basic purpose of preparing the statement is to have a rich into the financial operations of the concern. It analyses how the funds were obtained and used in the past. In this sens, it is a valuable tool for the finance manager for analyzing the past and future plans of the firm and their impact on the liquidity. He can deduce the reasons for the imbalances in uses of funds in the past an take necessary corrective actions. In analyzing the financial position of the firm, the Funds Flow Statement answers to such questions as1. Why were the net current assets of the firm down, though the net income was up or vice versa? 2. How was it possible to distribute dividends in absence of or in excess of current income for the period ? 3. How was the sale proceeds of plant and machinery used? 4. How was the sale proceeds of plant and machinery used? 5. How were the debts retired? 6. What became to the proceeds of share issue or debenture issue? 7. How was the increase in working capital financed? 8. Where did the profits go?

Though it is not an easy job to find the definite answerers to such questions because funds derived from a particular source re rarely used for a particular purpose. However, certain useful assumptions can often be made and reasonable conclusions are usually not difficult to arrive at.

Impotarance and short coming of ffs

Funds flow statement is a financial statement, which shows as to how a business entity has obtained its funds & how it has applied or employed its funds between the opening & closing balance sheet dates(during the particular year/period. Importance of funds flow statement: Funds flow statement is an important analytical tool for external as well as internal uses of financial statements. The users of funds flow statement can be listed as under : 1. Managements of various companies are able to review cash budgets with the aid of funds flow statements. They are extensively used by the management in the evaluation of alternative finance & investments. In the evaluation of alternative finance & investment plans, funds flow statement helps the mangement in the assessment of long-range forecasts of cash requirements & availability of liquid resources. The management can judge the quality of management decisions. 2. Investors are able to measure as how the company has utilized the funds supplied by them & its financial strength with the aid of funds statements. They gauge can the company capacity to generate funds from operations. On the basis of comparative study of the past with the present, investors can locate & identify possible drains on funds in the near future. 3. Funds statement serve as effective tools to the management for economic analysis as it supplies additional information, which cannot be provided by financial statements, based on historical data.

4. Fund statement explains the relationship between changes in working capital & net profits. Funds statement clearly shows the quantum of funds generated from operations. 5. Funds statement helps in the planning process of a company. They are useful in assessing the resources available and the manner of utilization of resources. 6. Funds statement explains the financial consequences of business activities. They provide explicit & clear awareness to questions regarding liquid & solvency positions of the company, distribution of dividend & whether the working capital has been effective or otherwise. 7. Management of companies can forecast in advance the requirements of additional capital & can plan its capital issue accordingly. 8. Fund statement provide clues to the creditors & financial institutions as to the ability of a company to use funds effectively in the best interest of the investors, creditors & the owners of the company. 9. Funds statement indicates the adequacy or inadequacy of working capital. 10. The information contained in fund flow statement is more reliable, dependable & consistent as it is prepared to include funds generated from operations & not net profit after depreciation. 11. Funds flow statement clearly indicate how profits have been invested, whether investments in fixed assets or inventories or ploughed back.