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

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.

Balance Sheet.
Income Statement.
Cash Flow Statement.
Fund Flow Statement

The first two statements measure one aspect of the 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 period. Funds 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report changes in a business's working capital from its operations in a single time period but have largely been superseded by cash flow statements.

A Cash Flow Statement is a statement showing changes in the 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 the 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

Cash
Receivables
Inventory

Current Liabilities

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 the 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.

A Cash Flow Statement comprises information on the following 3 activities:

Operating Activities
Investing Activities
Financing Activities

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.

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.

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 a broader concept i.e. working capital.	The cash flow statement is based on a 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 starts 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.	The 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.	The 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 an accrual basis are converted into cash basis.

Advantages of Cash Flow Statement

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.
It helps the company inaccurately 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.
It acts like a filter and is used by many analysts 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 the balance sheet and the cash flow statement, it means that statements are incorrect.

Disadvantages of Cash Flow Statement

Since it shows only cash position, it is not possible to deduce the actual profit and loss of the company by just looking at this statement.
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 a statement of sources and uses of funds. The advantages of such a financial statement are many fold.

Some of these are:

Funds flow statement reveals the net result of Business operations done by the company during the year.
In addition to the balance sheet, it serves as an additional reference for many interested parties like analysts, creditors, suppliers, government to look into the financial position of the company.
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.
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.
Funds flow statement helps the management in deciding its future course of plans and also it acts as a control tool for the management.
Funds flow statement should not be looked alone rather it should be used along with the balance sheet in order to 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.

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.
Fund Flow Statement does not reveal the cash position of the company, and that is why company has to prepare the cash flow statement in addition to the funds flow statement.
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 a systematic way and therefore many companies tend to avoid preparing funds flow statements.
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”