Financial Management-Nibm

Subject : Financial Management

Answer no 01

1) What is a Fund Flow Statement? Discuss the uses and preparation of Fund flow statements.

Ans: The Fund flow statement is widely used by financial analysts, credit granting institutions and financial managers. The income statement and the and the Balance sheet have limited role to perform as far as the question of analysis of financial position is concerned.

The term ‘fund’ has variety of meaning. It may be taken as ‘cah’ and in that case, there is no difference between a Funds flow statement and a Cash flow statement. The term ‘flow’ means change and the term ‘flow of funds’ means ‘change in funds’ or ‘change in Working Capital’. This means that any increase or decrease in working capital is ‘Flow or Funds’. In business some transactions cause increase of funds while others decrease the fund, and some may not make any change in the position of funds. Where a transaction results in increase of funds, it is called a ‘source of funds’ and where a transaction results in decrease of funds, it is an ‘application or use of funds’. For example in case of share, the transaction increases the funds and in case of purchase of plant and machinery, funds stand reduced. The first transaction causes funds to increase or it is the source of funds, and latter transaction causes funds to decrease, and it is therefore and application or use of funds. 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.

Uses of Funds Flow Statement

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

1) It explains the financial consequences of business operations.

2) It gives reasonable...