Financial Management

1) Que: What are the uses of Funds Flow Statement? How is it prepared?

Ans: Definition: The funds-flow-statement is a report on financial operations changes, flow or movements during the period. It is a statement which shows the sources and application of funds or it shows how the activities of a business are financed in a particular period. In other words, such a statement shows how the financial resources have been used during a particular period of time. It is, thus, a historical statement showing sources and application of funds between the two dates designed especially to analyze the changes in the financial conditions of an enterprise.

The funds flow statement is a method by which we study the net funds flow between two points in time. These points conform to beginning and ending financial statement dates for whatever period of examination is relevant – a quarter or a half year or a year.

There are various elements of business that affect fund/cash flow. These include such things as increased sales, reductions or increases in debtors, longer or shorter times in paying creditors, repayments of loans, etc., a summary of which should be shown on separate lines of the statement. It can start with a section listing the elements that contribute to an increase in cash, then the next section lists those items which have contributed to a decrease in cash.

Uses of Funds Flow Statement: Funds flow statement is a tool for analysis and understanding the changes in the distribution of resources between two balance sheet dates. The uses of funds flow statement are as follows:

1. The users of fund flow statement, such as investors, creditors, bankers, government, etc., can understand the managerial decisions regarding dividend distribution, utilization of funds and earning capacity with the help of fund flow statement.

2. The quantum of working capital is revealed by the schedule of working capital changes, which is a part of fund flow statement.

3. The fund...