The term ‘funds’ has a variety of meanings. There are people who take it as synonymous with cash and to them, there is no difference between a Funds-Flow statement and a Cash-Flow Statement. While others include marketable securities besides cash in the definition of the term “Funds. Let’s know in detail what is funds and the flow of funds.
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What is funds?
However, the most commonly accepted meaning of the term “Funds” is the ‘working capital’ of the business. Working capital denotes the excess of current assets over the current liabilities.
The ‘current assets’ as stated in the earlier chapter include assets that are acquired with the intention of converting them into cash during the business operation of the firm.
The broad categories of current assets, therefore, are
- Cash including deposits with banks,
- Accounts receivable, i.e., trade debtors and bills receivables,
- Inventory, i.e., stocks, raw materials, work-in-progress, finished goods, stores, and spares.
- Advances recoverable, i.e., the advances given to supplier of goods and services or deposit with government or other public authorities, e.g., customs, port authorities, advance income-tax, etc.,
- Pre-paid expenses, i.e., cost of unexpired services, e.g., insurance premium paid in advance, etc. It is to be noted that short-term investments should also be included in the definition of the term “current assets”.
The term ‘current Liabilities’ is principally to designate such obligations that are expected to be payable within a year out of the current assets or by the creation of current liabilities.
The broad categories of current liabilities are:
- Borrowing from banks.
- Short-term loans, i.e., loans from banks, etc., which are payable within one year from the date of the balance sheet,
- Accounts payable, e.g., bills payable and trade creditors.
- Outstanding expenses, i.e., expenses for which services have been received by the business but for which the payment has not been made,
- Advance payments are received by the business for the services to be rendered or goods to be supplied in time.
What is the flow of funds?
The term ‘Flow’ means change and, therefore, the term ‘Flow of Funds’ means ‘change in funds’ or ‘change in working capital. In other words, any increase or decrease in working capital means ‘Flow of Funds’.
In business, several transactions take place. Some of these transactions increase the fund while others decrease the fund. Some may not make any change in the fund position. In case a transaction results in an increase of funds, it will be termed as ‘source of the fund’. For example, if by the ‘issue of share’ the capital is increased, this increase in capital will be treated as a source of funds.
In case a transaction results in a decrease in funds, it will be taken as an application or use of funds. For example, if the fund is spent on the purchase of furniture and thereby the fund stands reduced, it will be taken as an ‘application of funds’. In case a transaction does not make any change in the fund’s position that existed just before the happening of the transaction, it is said that it is a non-fund transaction.
So, the fund-flow statement is a technical device designed to highlight the changes in the financial condition of a business enterprise between the opening and the closing balance sheet dates. A fund-flow statement is, therefore, a statement depicting the change in working capital. The fund-flow statement is a complementary statement to the balance sheet.
While applying for accommodation to a bank or financial institution, a fund-flow statement is required to be submitted statement is also very useful when entertaining an advance proposal on a term basis, particularly when the amount is large. It will, therefore, be necessary to know about the concept and importance of this statement.
Hope you find your answer to what is funds and the flow of funds?
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