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What is a Fund Flow Statement? Why should a business prepare it?
Funds flow statement is a statement which is prepared in order to determine the sources and application of funds. Fund flow statement is commonly used in business plans and proposals to show investors about the flowing of their funds through the organization. This is not used in annual reports. It is used by bankers who want to know how borrowed funds will flow through company operations. It is used to show the management how the cash is flowing through the company operations.
What are the limitations of a Funds Flow Statement?
Fund flow statement has certain limitations such as:
1. This kind of statement is prepared using balance sheet and these statements are based on historical cost so realistic comparison of profitability is not possible.
2. Cash position is not prepared and it is not revealed by funds flow statement.
3. While preparing funds flow statement operating, financial and investing activities are not classified.
What are the basic principles of preparing a Funds Flow Statement?
Funds flow statement, which shows the changes in financial position. It is governed by the basic principle which uses two parts one uses statement of sources and another uses the use of funds. It can be compared to balance sheet which has been drawn by taking these parameters into affect. In this when sources of funds exceed the application of funds, it increases the working capital or when application of funds exceeds it decreases the working capital.
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