In general financial statement is Balance Sheet and profit and loss account, popularly known as income statement speaks about the net effect of various transactions on the operational and financial position of the company.
Thus, the Balance sheet is a statement of Assets and liabilities of an organization between two periods of time. The Balance sheet assets side shows the development of resources of an undertaking. Whereas the liabilities side indicates its payments to outsiders.
The Profit and loss account shows the income and expenditure of an accounting year, generally a year. Thus, these two statements show the financial highlights of the company. A third statement is prepared o show changes in assets and liabilities from the end of one period of time to the end of another period of time. This statement is known as financial position or fund flow statement.
Fund flow statement is a statement which shows the movement of funds and report of the financial operations of the enterprise. It shows various means by which funds are obtained and where the same are used.
Definitions of fund flow statement
The following are the definitions of fund flow statement:
1. Rober N. Anthony—The fund flow statement describes the sources from which additional funds were derived and the use to which these sources were put to use.
2. ICWA. It is a statement either prospective or retrospective, setting out the sources and application of the funds of the enterprise. The purpose of the statement is to indicate how funds are raised and how the same have been utilized.
3. Yorston , Smyth and Brown. “A fund flow statement is prepared in summary form to indicate change ( and trends) are prepared regularly. ”
4. Foulke. “A statement of sources and application of funds is a technical device designed to analyze the changes in the financial conditions of a business enterprise between two dates. ”
The fund flow statement is a statement which indicates various means by which the funds have been obtained during a specific period and the ways to which these funds have been used during that period.
Fund flow statement is a statement of cash inflows and cash outflows. There are persons who feel that the funds are cash or working capital which represent the excess of current assets over current liabilities.
The term flow means movement and includes both inflows and outflows of resources. The fund flow and statement means change in working capital. It is also known as the statement of sources and uses of funds.
Format/Specimen of fund now statement
Below is the Format/Specimen of fund flow statement.
|Sources of Funds||Applications of funds|
|1. Increases in share capital (both equity and preferential).||1. Decrease in share capital (redemption of preferential share capital).|
|2. Increase in share premium.||2. Reduction in share premium.|
|3. Increase in long term loans. (Debentures etc)||3. Redemption of debentures.|
|4. Income from Operations (Profit).||4. Income from Operations. (Loss).|
|5. Sale of fixed assets.||5. Purchase of fixed assets.|
|6. Decrease in working capital.||6. Increase in working capital.|
Objectives and uses of fund flow statement
The main objectives and uses of fund flow statement are as below.
1. Knowledge of Financial Position. The fund flow statement indicates the addition in profits which is a boon to the shareholders. The division of profit can be planned.
2. Knowledge of addition in share capital. The fund flow statement can highlight the changes in share capital. What is the need of increase in share capital and where the same have been used?
3. Knowledge of Addition or Reduction in Share Premium. The fund flow statement clearly shows the fluctuation in share premium. It is increased when shares are issued at premium when preferential shares or debentures are reduced, the premium it will reduce both position can be seen from this statement.
4. Knowledge of profit or loss of operation. The fund flow statement can easily show whether the organization is earning profit or going into loss.
5. Knowledge of addition in long term Borrowings. This statement can show the additional amount borrowed by issuing debentures. Why is the issue of debentures desirable?
6. Knowledge of decrease in working capital. This statement shows the reduction in working capital. It will be when current assets are less than current liabilities. It speaks about more revenues to the organization.
7. Fund flow statement acts as a guide. It also works as guide to the management. The management can know various future problems of the company. The future needs of the company can be predicted. The management can manage to raise funds effectively and can avoid financial problems of the organization.
8. Helpful in sound dividend policy. There are cases where a company having sufficient profit yet it is advisable not to distribute dividend for lack of cash or liquid. The statement of fund is useful in forming sound dividend policy.
9. Helpful in long term borrowings. The various financial institutions before advancing long term loans ask for many years fund flow statement to know the worthiness of credit of the firm.
10. Useful information to the investors. Before investing funds some investors like to study its fund flow statement to know how the funds are raised, and how these are applied. Whether funds are adequate or not for the payment of interest and principal sum.
11. Other uses of fund now statement.
(i) It highlights whether or not sufficient funds are available for shareholders dividend.
(ii) The ability of the organization to thrust the organization for getting additional working capital.
(iii) Justification for long term borrowings.
(iv) Knowledge of sources of funds for the purchase of fixed assets.
Limitations of fund flow statement
The main limitations against fund flow statement are as under:
1. Fund flow statement is not a substitute of income statement or Balance Sheet. The only limiting factor about fund flow statement is that it is not a substitute for income statement and Balance sheet. Fund flow statement provides some other additional information regarding change in working capital.
2. It cannot state the reason why capital is raised or redeemed?
3. It is a by-product of financial statement. As a matter of fact, fund flow statement is re-arranged statement of financal data.
4. Based on historical data. Fund flow statement is historical in nature as it is the outcome of old financial data which are simply a window dressing.
5. Misleading. Fund flow statement is, sometimes misleading if an analyst does not know the reality and soundness of the figures from which they are computed.