Nature of Funds Flow and Cash Flow Statements

Let’s know about the nature of funds flow and cash flow statements. The word “Funds” is used to denote cash or economic values and the term “flow” in the context of funds indicates the another or from one equity to another or from an asset to equity or vice-versa or a combination of any of these, but these movements must take place on account of external rather than internal transactions of the business.

Thus, in the sense of cash, a projected funds-flow statement comprises expected additional receipts and payments of cash while in the context of economic values the statement is made up of an estimated amount of additional purchasing powers generated in the business not necessarily cash as a source of funds and how they are proposed to be utilized.

Nature of funds flow and cash flow statements

The Fund-Flow Statement and Cash-Flow Statement are widely used by financial analysts, credit-granting institutions, and financial managers in the performance of their jobs. They have become useful tools in their analytical kit.

This is because the financial statements, i.e., the Income statements and the ‘Balance Sheet’ have a limited role to perform. Income statement measures flow restricted to transactions that pertain to the rendering of goods or services to customers. The balance sheet is merely a static statement.

Nature of Funds Flow and Cash Flow Statements
Nature of Funds Flow and Cash Flow Statements

The balance sheet study suffers from the drawback that it refers to the position at a particular point in time. Form the study of two or more balance sheets for successive years, one can know the position of assets and liabilities of the company on the dates of the balance sheets. The lending institution is, however, also interested to find out what happened during the intervening period/s. This can be done by studying the fund’s flow statement.

A funds-flow statement is a condensed report of the financial activities of the business of an industrial unit during the period covered by the statement. It describes the sources from which additional funds were derived and the uses to which these funds were put. It studies how:

  1. The activities of the business have been financed, and
  2. How the financial resources have been utilized during the period, say, a year from the date of one balance sheet to the date of the successive balance sheet.

The funds-flow statement in fact shows the ebb and flow of funds into and out of the business during the period under review. It is thus a report on financial operations, changes, flows, or movement of funds during the period.

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