What is a Funds Flow Statement?
Funds Flow Statement consists three terms Funds, Flow
and Statement
Where
Funds = Current Assets – Current Liabilities = Working Capital
Flow = Changes
A statement, which shows ‘Flow of Funds’ or ‘Changes in Working
Capital’ is called "Funds Flow Statement".
Funds Flow Statement is prepared to workout the sources from
where the additional funds have been received during the year
and for what purposes these funds have been applied.
According to Smith Brown, "Funds Flow Statement
is prepared in summary form to indicate changes (and trends
if prepared regularly) occurring in items of financial condition
between two different balance sheet dates."
According to R.N. Anthony, " Funds Flow Statement
is a statement prepared to indicate the increases in the cash
resources and the utilisation of such resources of a business
during the accounting period."
Funds Flow Statement Objectives
Profit & Loss Account and Balance Sheet are not able
to give answer to some basic questions. For this purpose Funds
Flow Statement is prepared. According to Perry Mason who points
out in AICPA Research Study No. 2 that without such a statement,
the following questions will remain unanswered:
- Where did profit go?
- Why were dividends not larger?
- How was it possible to distribute dividends in excess
of current earnings or in the presence of net loss for the
period?
- Why were the net current assets down although the net
income is up?
- How is that the net current assets are up even though
there was a net loss for the period?
- Why must money be borrowed to finance purchase of new
plant and equipment when the required amount is exceeded
by the "cash flow" (the sum of net income and
depreciation)?
- How was the expansion in plant and equipment financed?
- What happened to the proceeds of the sale of plant and
machinery resulting from a contraction of operation.
- How was the retirement of debt accomplished?
- What became of the assets derived from an increase in
out-standing capital stock?
- What became of the proceeds of the bond issue?
- How was the increase in working capital financed?
What are the objectives of Funds Flow Statement? |
Accounts
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