Presentation

on
“Funds Flow & Cash Flow
Analysis”
BY
Dr. G. Sunitha
Asst. Professor, SOM
National Institute of Technology
Warangal
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 WHAT IS FLOW
The term flow means movement and includes both ‘inflow and
outflow’. The term flow of funds means transfer of economic values
from one asset of equity to another.
Flow of funds is said to have taken place when any transaction
makes changes in the amount of funds available before happening of
the transaction
According to the working capital concept of funds, the term ‘flow of
funds’ refers to the movement of funds in the working capital.
If any transaction results in the increase in working capital, it is
said to be a source or inflow of funds and if it results in the decrease
of working capital , it is said to be a n application or out flow of funds.
The flow of funds occurs when a transaction changes on the one
hand a non current account and on the other a current account and
vice- versa.
 WHAT IS FLOW
Analyse the transaction and find
out the two accounts involved
Make journal entry of the
transaction
Determine whether the accounts
involved in the transaction are
current or non-current
If both the account involved are
current i.e either current assets or
current liabilities, it does not
result in the flow of funds
If both the account involved are
non-current, i.e. either permanent
If the or
assets accounts involved
permanent are suchitthat one is current account while the other is
liabilities,
a non
still current
does account,
not result i.e, flow
in the current
of asset and permanent liability or current
asset
funds and fixed asset, or current liability and fixed asset, or current liability and
permanent liability then it results in the flow of funds
DEFINITIONS:

“The funds flow statement describes the sources from which

additional funds were derived and the use to which these sources
were put. ---Anthony

“ A statement either prospective or retrospective, setting out the

sources and applications of the funds 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” -----I.C.W.A

A statement of sources and application of funds is a technical

device designed to analyse the changes in the financial condition of
a business enterprise between two dates” ---Foulke
SIGNIFICANCE:

It helps in the analysis of financial operations

It throws light on many perplexing questions of general interest
It helps in the formation of a realistic dividend policy
It helps in the proper allocation of resources
It acts as a future guide
It helps in appraising the use of working capital
It helps knowing the overall creditworthiness of a firm
 SOURCE AND APPLICATIONS OF FUNDS
Funds from Operations Funds lost in Operations

Redemption of
Issue of Share Capital
Preference Capital

Repayment of Longterm
Issue of Debentures
Loans
FUNDS
Sales of Non-Current Purchase of Non-Current
Assets Assets

Payment of Dividend
Non-Trading Receipts
and Tax

Decrease in Working
Non-Trading Payments
Capital
LIMITATIONS:

It should be remembered that a funds flow statement is not a

substitute of an income statement or a balance sheet. It provides
only some additional information as regards changes in working
capital
It cannot reveal continuous changes
It is not an original statement but simply are arrangement of
data given in the financial statements
It is essentially historic in nature and projected funds flow
statement cannot be prepared with much accuracy
Changes in cash are more important and relevant for financial
management than the working capital
 CASH FLOW STATEMENT:
Cash plays very important role in the entire economic life of a business. A
firm needs cash to make payments to its suppliers, to incur day to day
expenses and to pay salaries, wages, interest and dividends etc.
It is very essential for a business to maintain an adequate balance of cash.
But many times a concern operates profitably and yet it become very difficult
to pay taxes and dividends, so cash is of vital importance to the management
It is a statement of changes in the financial position of firm on cash basis is
called a cash flow statement. Such a statement enumerates net effects of the
various business transactions on cash and takes into account receipts and
disbursement of cash.
A cash flow statement summaries the causes of changes in cash position of a
business enterprise between dates of two balance sheets.
This statement is very much similar to the statement of changes in financial
position prepared on working capital basis i.e., a funds flow statement except
that a cash flow statement focuses attention on cash instead of working
capital. It is called cash flow statement.
COMPARISON BETWEEN FUDNS FLOWS & CASH
FLOW STATEMENT:
Funds flow statement is based on a wider concept of funds i.e.,
working capital, while cash flow statement is based on the narrower
concept of funds i.e., cash only
Funds flow statement is based on accrual basis of accounting while
cash flow statement is based on cash basis of accounting. In cash flow
statement while calculating operating profits, adjustments for
prepaid and outstanding expenses and income are made to convert
the data from accrual basis to cash basis; but no such adjustments
are required to be made while preparing a funds flow statement
A funds flow statement does not reveal changes in current assets
and current liabilities, rather these appear separately in a schedule of
changes in working capital. No such schedule of changes in working
capital is prepared for a cash flow statement and changes in all assets
and liabilities fixed as well as current, are summarized in the cash
flow statement
COMPARISON BETWEEN FUDNS FLOWS & CASH
FLOW STATEMENT:
Cash flow statement is prepared by taking the opening balance of
cash adding to this all the inflows of cash and deducting the
outflows of cash from the total. The balance i.e., opening balance
of cash and inflows of cash minus out flows of cash is reconciled
with closing balance of cash. No such opening or closing balance
appear in a funds flow statement. The net difference between
sources and applications of funds does not present cash rather it
reveals the net increase or decrease in working capital
Funds flow statement is useful in planning intermediate and
long-term financing while a cash flow statement is more useful for
short term analysis and cash planning of the business
 DIFFERENCE BETWEEN FUDNS FLOWS & CASH
FLOW STATEMENT:
Basis Funds Flow
Basis of Concept It is based on a wider concepts of
funds
Basis of Accounting Accrual basis of accounting
Schedule of changes Schedule of changes in prepared to
in show the changes in current assets
Working Capital and current liabilities
Methods of Preparing Fund flow statement reveals the
sources and applications of funds. The
net difference sources and
applications of funds represents new
increase or decrease in working capital
Basis of Usefulness It is useful in planning intermediate
and long term financing
Cash Flow
It is based on a narrow concept of fund i.e.,
Cash
Cash basis on accounting
No such schedule of changes in working
capital is prepared
It is prepared by taking the opening
balance of cash adding to this all the
inflows of cash and deducting the outflows
of cash from the total the difference
represents the closing balance of cash
It is more useful for short term analysis and
cash planning of the business
SIGNIFICANCE:
Evaluation of cash position of a firm
To forecast the future requirements
Helpful to take immediate and effective action
To know the liquidity position of the company
To plan the repayment of loan and capital budgeting
To know the causes for poor cash position
To know the short term financial analysis
LIMITATIONS:
Difficult to precise the term ‘cash’
Exclusion of near cash items
Less comprehensive than funds flow
THANK YOU