Funds Flow Statement:- Meaning and it's Significance

FUNDS FLOW STATEMENT:
 The basic financial statement i.e., the balance sheet and profit and loss account (or) income statement of the business, reveal the net effect of the various transaction on the operational and financial position of the assets and liabilities of an undertaking at particular point of time. It reveals the financial status of the company.   The assets side of a balance sheet shows of the deployment of resources of an undertaking while the liabilities side indicates its obligation i.e., the manner in which these resources were obtained.

The profit and loss account reflects the results of the business operations for a period of time. It contains a summary expenses incurred and the revenue realized in an accounting period. Both these statement provide the essential basis information on the financial activities of a business. The balance sheet give a static view of the resource(liabilities) of a business and uses(assets) to which these resources have been put at a certain point of time. It does not disclose the close for changes in the assets and liabilities between two different points of time.

  The profit and loss account, in a general way, indicates the resources an undertaking and which do not operate through profit and loss account. Thus another statement has to prepare to show the change in the assets and liabilities from the end of one period of time to the end of another period of time. The statement is called a statement of changes in financial position or a Funds Flow Statement.
    Funds flow Statement format shows the sources from which funds come and application or use of those funds.

 The Funds Flow Statement is a statement which shows the movement of funds and is a report of the financial operations of the business undertaking. It indicates various means by which funds were obtained during a particular period and the way to which these funds were employed. In simple words, it is a statement of sources and applications of funds.

MEANING AND CONCEPT OF FLOW OF FUNDS: 
The term ‘Flow’ means movement and includes both ‘inflow’ and ‘outflow’ the term ‘flow of funds’ means transfer economic values from one asset equity to another flow funds is said to have taken place when any transaction of the transaction.

• If the effect of transaction result in the increase of funds, it is called a source of funds and if it results in the decrease of funds, it is known as application of funds. 
• Further, in case the transaction does not change funds. It is said to have not resulted in the flow of funds. 
• According to the working capital concept of funds, the term ‘flow of funds’ refers to the movement of funds in the working capital. If any transaction result in the increase in working capital it is said to be a source or inflow of funds and it result in decrease of working capital, it is said to be an application or out flow funds. 

In simple language funds move when a transaction effects,
A current assets and a fixed assets or,
A fixed and a current liability,
A current asset and a fixed liability,
A fixed liability and current liability. And funds do not move when the transaction effects fixed assets and fixed liability or current assets and current liabilities.

 NEED AND IMPORTANCE (Significance)

 Funds Flow Statement is an important financial tool, which analyze the changes in financial position of a firm showing the sources and applications of its funds. It provides useful information about the firm’s operating, financing and investing activities during a particular period. The following points highlight the importance of Funds Flow Statement.

• Funds Flow Statement helps in identifying the change in level of current assets investment and current liabilities financing.
• Funds Flow Statement helps in analyzing the changes in working capital level of a firm.
• Funds Flow Statement shows the relationship of net income to the changes in funds from business operation. 
• Funds Flow Statement report about past fund flow as an aid to predict future funds flow.
• Funds Flow Statement helps in determining the firm’s ability to pay interest and dividend, and pay debt when they become due.
• Funds Flow Statement shows the firm’s ability to generate long term financing to satisfy the investment in long term assets.
• Funds Flow Statement helps in identifying the factor responsible for changes in assets, liabilities and owner’s equity at two balance sheet date.