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Difference Advantage Disadvantage and Uses of
Cash Flow Statement & Funds Flow Statement

There are 3 basic financial statements that exist in the area of Financial Management.

1. Balance Sheet.

2. Income Statement.

3. Cash Flow Statement.

4. Fund Flow Statement

The first two statements measure one aspect of performance of the business over a period of time. Cash flow statements signify the changes in the cash and cash equivalents of the business due to the business operations in one time periodFunds flow statements report changes in a business's working capital from its operations in a single time period, but have largely been superseded by cash flow statements.

Title: Difference between Cash Flow & Fund Flow Statement - Description: Which is better, Cash Flow or Fund FlowCash Flow Statement is a statement showing changes in cash position of the firm from one period to another. It explains the inflows (receipts) and outflows (disbursements) of cash over a period of time. The inflows of cash may occur from sale of goods, sale of assets, receipts from debtors, interest, dividend, rent, issue of new shares and debentures, raising of loans, short-term borrowing, etc. The cash outflows may occur on account of purchase of goods, purchase of assets, payment of loans loss on operations, payment of tax and dividend, etc.

A cash flow statement is different from a cash budget. A cash flow statement shows the cash inflows and outflows which have already taken place during a past time period. On the other hand a cash budget shows cash inflows and outflows which are expected to take place during a future time period. In other words, a cash budget is a projected cash flow statement.

Funds Flow Statement states the changes in the working capital of the business in relation to the operations in one time period.

The main components of Working Capital are:

Current Assets

1.    Cash

2.    Receivables

3.    Inventory

Current Liabilities

1.    Payables

Net working capital is the total change in the business's working capital, calculated as total change in current assets minus total change in current liabilities.


FOR EXAMPLE: If the inventory of the business increased from Rs 1,40,000 to Rs 1,60,000, then this increase of Rs 20,000 is the increase in the working capital for the corresponding period and will be mentioned on the funds flow statement.  But the same would not be reflected in the cash flow statement as it does not involve cash.

So the Fund Flow Statement uses all the above four components and shows the change in them. While a cash flow statement only shows the change in cash position of the business.

Cash flow statements have largely superseded funds flow statements as measurements of a business's liquidity because cash and cash equivalents are more liquid than all other current assets included in working capital's calculation.

What is Included in a Cash Flow Statement?

The statement of cash flows uses information from the other two statements (Income Statement and Balance Sheet) to indicate cash inflows and outflows.

Title: Cash Flow Activities - Description: Operating Activities, Investing Activities, Financing ActivitiesA Cash Flow Statement comprises information on following 3 activities:

      1.  Operating Activities

      2.  Investing Activities

      3.  Financing Activities

 

 

1. Operating Activities: Operating activities include cash flows from all standard business operations. Cash receipts from selling goods and services represent the inflows. The revenues from interest and dividends are also included here. The operational expenditures are considered as outflows for this section. Although interest expenses fall under this section but the dividends are not included .Dividends are considered as a part of financing activity in financial accounting terms.

2.   Investing Activities: Investing activities include transactions with assets, marketable securities and credit instruments. The sale of property, plant and equipment or marketable securities is a cash inflow. Purchasing property, plant and equipment or marketable securities are considered as cash outflows. Loans made to borrowers for long-term use is another cash outflow. Collections from these loans, however, are cash inflows.

3.   Financing Activities: Financing activities on the statement of cash flows are much more defined in nature. The receipts come from borrowing money or issuing stock. The outflows occur when a company repays loans, purchases treasury stock or pays dividends to stockholders. As the case with other activities on the statement of cash flows depend on activities rather than actual general ledger accounts.

Table of Difference between Funds Flow Statement and Cash Flow Statement


Basis of Difference

Funds Flow Statement

Cash Flow Statement

1.

Basis of Analysis

Funds flow statement is based on broader concept i.e. working capital.

Cash flow statement is based on narrow concept i.e. cash, which is only one of the elements of working capital.

2.

Source

Funds flow statement tells about the various sources from where the funds generated with various uses to which they are put.

Cash flow statement stars with the opening balance of cash and reaches to the closing balance of cash by proceeding through sources and uses.

3.

Usage

Funds flow statement is more useful in assessing the long-range financial strategy.

Cash flow statement is useful in understanding the short-term phenomena affecting the liquidity of the business.

4.

Schedule of Changes in Working Capital

In funds flow statement changes in current assets and current liabilities are shown through the schedule of changes in working capital.

In cash flow statement changes in current assets and current liabilities are shown in the cash flow statement itself.

5.

End Result

Funds flow statement shows the causes of changes in net working capital.

Cash flow statement shows the causes the changes in cash.

6.

Principal of Accounting

Funds flow statement is in alignment with the accrual basis of accounting.

In cash flow statement data obtained on accrual basis are converted into cash basis.

 Advantages of Cash Flow Statement

1.   It shows the actual cash position available with the company between the two balance sheet dates which funds flow and profit and loss account are unable to show. So it is important to make a cash flow report if one wants to know about the liquidity position of the company.

2.   It helps the company in  accurately projecting the future liquidity position of the company enabling it  arrange for any shortfall in money by  arranging finance in advance and if there is excess than it can help the company in earning extra return by deploying excess funds.

3.   It acts like a filter and is used by many analyst and investors to judge whether company has prepared the financial statements properly or not because if there is any discrepancy in the cash position as shown by balance sheet and the cash flow statement, it means that statements are incorrect.

Disadvantages of Cash Flow Statement

1.   Since it shows only cash position, it is not possible to deduce actual profit and loss of the company by just looking at this statement.

2.   In isolation this is of no use and it requires other financial statements like balance sheet, profit and loss etc…, and therefore limiting its use.

Advantages of Fund Flow Statements

A Funds flow statement is prepared to show changes in the assets, liabilities and equity between two balance sheet dates, it is also called statement of sources and uses of funds. The advantages of such a financial statement are many fold.

Some of these are:

1.   Funds flow statement reveals the net result of Business operations done by the company during the year.

2.   In addition to the balance sheet, it serves as an additional reference for many interested parties like analysts, creditors, suppliers, government to look into financial position of the company.

3.   The Fund Flow Statement shows how the funds were raised from various sources and also how those funds were deployed by a company, therefore it is a great tool for management when it wants to know about where and from what sources funds were raised and also how those funds got utilized into the business.

4.   It reveals the causes for the changes in liabilities and assets between the two balance sheet dates therefore providing a detailed analysis of the balance sheet of the company.

5.   Funds flow statement helps the management in deciding its future course of plans and also it acts as a control tool for the management.

6.   Funds flow statement should not be looked alone rather it should be used along with balance sheet in order judge the financial position of the company in a better way.

Disadvantages of Fund Flow Statements

      Funds flow statement has many advantages; however it has some disadvantages or limitations also.

Let’s look at some of the limitations of funds flow statement.

1.   Funds Flow statement has to be used along with balance sheet and profit and loss account for inference of financial strengths and weakness of a company it cannot be used alone.

2.   Fund Flow Statement does not reveal the cash position of the company, and that is why company has to prepare cash flow statement in addition to funds flow statement.

3.   Funds flow statement only rearranges the data which is there in the books of account and therefore it lacks originality. In simple words it presents the data in the financial statements in systematic way and therefore many companies tend to avoid preparing funds flow statements.

4.   Funds flow statement is basically historic in nature, that is it indicates what happened in the past and it does not communicate anything about the future, only estimates can be made based on the past data and therefore it cannot be used the management for taking decision related to future.

We can conclude that shorter the planning period more relevant is the “Cash Flow Statement and longer the planning period more relevant is the “Fund Flow Statement”

....

 
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Comments..


Deepak Jain
04-Jul-2013

Please post your comments, queries and we would be happy to answer them.......

NARAYANAN NAIR
21-Jul-2013

well explained .thanks

D MOHAN
07-Aug-2013

Well explained & Very useful. Thanks a lot...

Anish P Mohan
20-Feb-2014

Itz Facilitate Understanding.. Thank You..

venkat.M
17-Aug-2013

well explained & useful to all financial students & employees. Thanks a lot....

Naveen Kumar
12-Feb-2014

Very clearly explained. Easy to understand. Thanks for providing such a nice information.

Prerak Vaishnav
02-Mar-2014

Is payment of dividends also included in the Fund flow statement as well as the cash flow statement?

Gururaj
04-Sep-2013

well cleared

vivek
18-Aug-2013

Very helpful and useful. Thanks.

T. VINU CHARLES
26-Aug-2013

Short and Simple with the root level explanation.

ravi kumawat
28-Feb-2014

good language in exam level

31-Aug-2013

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Bishnu Sarkar
12-Jun-2014

Very palpable to reader. Thanks !

31-Aug-2013

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sandeep
19-Sep-2014

VERY NICE.CLEARLY EXPLAINED.CONTINUE POSTING MORE FINANCE CONCEPTS.

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10-Apr-2014

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shubhi agrawal
01-Aug-2014

itz facilitate learning . thanks

01-Sep-2013

Francis
17-Feb-2014

explained very well, thanks

Francis
17-Feb-2014

explained very well, thanks

01-Sep-2013

01-Sep-2013

ramesh pasham
24-Apr-2014

very good information thanks a lot.....it is useful to every one

sks
19-Sep-2013

good article

Swapnil Gangele
23-Dec-2014

well explained

Suresh.T
08-Mar-2014

Very Simple Explinatory

01-Sep-2013

ramsunm
14-Apr-2014

need some exAMPLE

01-Sep-2013

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Md. enamul Haque
21-Mar-2014

Nicely m explained. It will be helpful for the manager of asset liability manageent. I would be also beneficial to the readers if an it is explained presenting two balance sheets. Many thanks

Md. enamul Haque
21-Mar-2014

Nicely m explained. It will be helpful for the manager of asset liability manageent. I would be also beneficial to the readers if an it is explained presenting two balance sheets. Many thanks

01-Sep-2013

01-Sep-2013

27-Sep-2013

28-Sep-2013

28-Sep-2013

27-Sep-2013

Md. enamul Haque
21-Mar-2014

Nicely m explained. It will be helpful for the manager of asset liability manageent. I would be also beneficial to the readers if an it is explained presenting two balance sheets. Many thanks

28-Sep-2013

28-Sep-2013

R Babu prasad
20-Sep-2013

Easy to learn and thanks to explain in details

28-Sep-2013

sai
17-Mar-2014

good explain

28-Sep-2013

28-Sep-2013

Pradeep SG
22-Oct-2013

Thanks It's usefull...

surajkumar patil
16-Feb-2014

This is much good explanation if added few examples then it would be great

28-Sep-2013

Peerless
27-Mar-2014

Difference is explained in expressive way easy in understanding. THanks a lot !!!

28-Sep-2013

28-Sep-2013

ANSHUL BHATIA
06-Jun-2014

very informative, but still more information can be added

afroz khan
30-May-2015

cash floe is to know the actual accuracy of cash amount of the firm

afroz khan
30-May-2015

cash flow is to know the actual accuracy of cash amount of the firm

sujit kumar behera
09-Dec-2013

u am satisfy with the answer.....

mukesh
09-Jun-2015

very nicely explained...keep it up

28-Sep-2013

28-Sep-2013

28-Sep-2013

Abhijit
04-Aug-2014

Comprehensively covered & neatly explained

28-Sep-2013

28-Sep-2013

ram kumar
21-Jan-2014

well explained with easy language, and very useful

28-Sep-2013

FASALURAHMAN
14-Feb-2014

Clear and very useful

Kenzu
16-Jun-2014

Like the suggested details provided. Would like to know more differences between the cash management & fund. In fact if some points specified like how they manage the funds & cash it would have been more useful. Anyways was nice reading this. Would like to get to know more on this.

NIshant kapoor
31-May-2014

Thank'ew so much sir.. exam hai aaj or notes b ni banaye the.. ab shayad pass ho jau.. ;)

Swanand Kale
21-Jul-2015

Thanks a lot for valuable inputs.

Swanand Kale
21-Jul-2015

Thanks a lot for valuable inputs.

Mohammad Saber
16-Jul-2014

Thanks it was useful and it was comprehensive explanation but if there was any example of cash flow and fund flow statement with solution, I think it would be very beautiful.

Amjath khan nani
22-Aug-2015

well very neatly explained thanks aloh

Edem
06-Aug-2014

I reckon the example about the inventory made it simple to coprehend

Edem
06-Aug-2014

I reckon the example about the inventory made it simple to comprehend. Thank you

Vishwanath
26-Sep-2014

Very Neatly explained non finance manager/non accounts manager can understand

maharoof
26-Oct-2014

Thanx for the note. Its expalins both cash and fund flow very brilliantly. Really informative. Thank you.

AMBE SAHAI
04-Nov-2014

ACTUALLY, CASH FLOW IS SMALL BROTHER OF FUND FLOW

AMBE SAHAI
04-Nov-2014

ACTUALLY, CASH FLOW IS SMALL BROTHER OF FUND FLOW

Naveen Swami
11-Jan-2015

Why interest on debenture is not treated in Fund flow statement but treated in Cash Flow Statement ?

P K Singh
23-Feb-2015

Thanks it was useful and it was comprehensive explanation, I think it would be very beautiful.

Kiran Kumara Konda
19-Mar-2015

Nice and detailed information you have shared and in a easy language.. Keep going.. Thank Q

SACHIDANANDA S HIREMATH
25-Oct-2015

needs example that too solved with narration

R.S.N.MURTHY
28-May-2015

GOOD AND ALSO TRY TO PROVIDE SOME MORE EXAMPLES PL. AND ALSO RATIO ANALYSIS PL.

shrikant kulkarni
11-Apr-2015

I learnt management accounting in in 1983 in CAIIB exam -above topic was part of the subject. I tempt to join the course of financial analysts Thank U

M.VENUMADHAVA REDDDY
02-May-2015

Regarding accounting basics, Ratio analysis and funds flow statement

khushbu
11-Dec-2015

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