operations by summarizing revenue and expenses during a period of time. While they do furnish useful financial data regarding operations, a serious limitation of these statements is that they do not provide information regarding changes in the firm’s financial position during particular period of time. They fail to provide the information regarding causes of changes or the movements of finances between two-time period or determine the various causes that lead changes in financial position of a concern.
Therefore, an additional statement should be prepared to show the changes in assets, liabilities and owner’s equity between dates of two balance sheets. Such a statement referred to as the statement of changes in financial positions. The statement of changes in financial position overcomes these limitations of basic financial statements. The most commonly used forms of the statement of changes in financial position are called the Funds Flow Statement and the Cash Flow Statement. Present chapter is oriented on the concept of Funds Flow Statement
4.2 MEANING & DEFINITIONS
The Funds Flow Statement is combination of three words Funds, Flow and Statement.
Funds mean working capital. There are mainly two concepts regarding the meaning
of the working capital. First, the broad concept according to which working capital refers to the gross working capital and represents the amount of funds invested in current assets. Thus, the gross working capital is the capital investment in total current assets of the enterprise. Current assets are those assets, which in the ordinary course of business can be converted onto cash within a short period of time normally one accounting year. Second, the narrow sense, which termed working capital as the excess of current asset over current liabilities or that part of the current asset, which is
financed by the long-term source of finance. In case of the Funds Flow Statement we will use the narrow concept of the working capital.
Flow means movement. It we take the flow of funds it means changes in the position
of the funds due to any transaction. As a result of the transaction the funds may increase or decrease. The increase in funds is called funds inflow and if funds decrease, it is called funds outflow. The one important point to be noted here is that the flow of funds only occurs when a transaction affects on the one hand a non current account and on the other a current account and vice-versa. If a transaction only two current account or only two non-current accounts then flow of funds does not take place because here funds means the difference of the current assets and current liabilities.
Statement means the written description about some thing or a detail note, which
provide the informations. The Funds Flow Statement means a summary of the sources and uses of the working capital.
Definitions:
“A statement of sources and application of funds is a technical device designed to analyze the changes in the financial condition of a business enterprise between two dates.” Foulke
According to I.C.W.A. “Funds Flow Statement is a statement either prospective or retrospective, setting out the sources and applications of the fund of an enterprise. The purpose of the statement is to indicate clearly the requirement of funds and how they are proposed to be raised and the efficient utilization and application of the same.”
the sources from which additional funds were derived and the use to which these sources were put.
Thus, Funds Flow Statement is a statement, which indicates various means by which the funds have been obtained during a certain period and the ways to which these funds have been used during that period.
4.3 OBJECTIVES OF FUNDS FLOW STATEMENT
As it is clear form the above discussion the main objective of the Funds Flow Statement is to know the sources and applications of the funds within a specific time period. Some other questions are also there which can be sorted out by the help of Funds Flow Statement. These questions are:
• What happened to the net profit? Where did they go?
• How the higher dividend can be paid in case of shortage of funds? • What are causes of the shortage of fund in spite of higher profit? • How the fixed assets have been financed?
• How the obligations are fulfilled?
• How was the increase in working capital financed and how it will be financed in future?
Importance of funds flow statement is as follows:
1. Provide the information regarding changes in funds position
Funds Flow Statement provides the infomations regarding the funds, from where they have procured and where they have invested meanwhile two specific dates.
Sometimes a firm has sufficient profit available for distribution as dividend but yet it may not be advisable to distribute dividend for lack of liquid or cash resources. In such cases, funds flow statement helps in the formation of a realistic dividend policy.
3. It helps in proper allocation of resources
The resources of a concern are always limited and it wants to make the best use of these resources. A projected funds flow statement constructed for the future helps in making managerial decisions. The firm can plan the deployment of its resources and allocate them among various applications.
4. It act as future guide
A projected funds flow statement also acts as a guide for future to the management. The management can come to know the various problems it is going to face in near future for want of funds. The firm’s future needs of funds can be projected well in advance and also the timing of these needs. The form can arrange to finance these needs more effectively and avoid future problems.
5. It helps in appraising the use of working capital
It helps to appraise the performance of a financial manager in utilization of the working capital and also suggested the right way to use the working capital efficiently.
6. It helps to the overall credit worthiness of a firm
The financial institutions and banks such as SFI, IDBI, IFCI etc. all ask for funds flow statement constructed for a number of years before granting loans to know the creditworthiness and paying capacity of the firm. Hence, a firm seeking financial assistance firm these institutions has no alternative but to prepare funds flow statements.
7. It helps to know about the utilization of the sources