Ask & Answer: India's Largest Education Community

(1)Defination:A fund flow statement is a statement prepared to analyse the reasons for changes in the financial position of a company between two balance sheets. It portrays the inflow and outflow of funds i.e. sources of funds and applications of funds for a particular period.
It is also righteous to say that a fund flow statement is prepared to explain the changes in the working capital position of a company.
(2)Objective:Broadly, a fund flow statement will give us the following two information:
Sources of funds - From where the funds have come in
Application of funds - Where these funds have been used
Components of a fund flow statement
A fund flow statement comprises of :
Sources of funds: It talks about the extent of funds availed from
Owners
Outsiders
Application of funds: It talks about how the funds have been utilized
Funds deployed in Fixed assets
Funds deployed in Current assets
It means that when the company is in need for funds for repaying it to the short-term obligation, it will be in cash crunch situation since once an investment is made into long term assets by the company it, it will not be in a position to convert it into liquid cash at a later stage due to the nature of the investment.
This is how the fund flow statement explains the source of funds and its utilization or application, allowing the users of financial information to interpret and know the impact on the business.
(3)Benefits of preparing a fund flow Statement:
It helps to explain the managers of funds as to why the company is sitting in liquidity strain despite making profits as reflected in profit and loss statement.
On the contrary, it helps the managers to understand as to how a company is financially strong despite losses made by it in its operation front.
A fund flow statement helps us to analyse whether any short-term funds are being used for long term purposes. The grey area which can only be highlighted by preparation of fund flow Statement.
(4) Users: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 Balance sheet.
For Example, Bankers who lend money to the company as Overdraft or Cash Credit in return for interest. The bankers use the information provided by the company in its profit and loss statement and balance sheet in preparing fund flow statements, which then enables them to take decisions as whether to provide its overdraft or cash credit facilities to its clients or not.