A funds flow statement is a financial statement that shows how funds have moved in and out of business during a specific period of time.
It is a tool used by businesses to understand their cash flow and identify areas where they can improve their financial position.
The funds flow statement captures the movement of funds that include both cash and non-cash items, such as depreciation, non-current assets, and long-term investments. The statement focuses on changes in working capital, such as inventory, accounts payable, and accounts receivable, and provides information on the sources of funds, such as new debt or equity, and the uses of funds, such as new investments or debt repayment. The funds flow statement also helps to determine a company’s ability to generate internal funds for investment in the long term.
How is a Funds Flow Statement Prepared?
As an AI language model, I can provide you with the steps on how to prepare a funds flow statement:
- Determine the opening balance of cash and cash equivalents: This can be obtained from the previous year’s financial statements.
- Determine the closing balance of cash and cash equivalents: This can be obtained from the current year’s financial statements.
- Analyze changes in working capital accounts: Working capital accounts such as accounts receivable, inventory, and accounts payable can have a significant impact on a company’s funds flow. Changes in these accounts over the year need to be analyzed and recorded properly.
- Prepare a schedule of non-cash items: Non-cash items such as depreciation, amortization, and deferred taxes need to be accounted for in the funds flow statement.
- Calculate net increase/decrease in working capital: The difference between opening and closing balances of working capital accounts are calculated.
- Calculate cash flow from operating activities: This includes all operating activities that result in either an increase or decrease in cash during the period under consideration.
- Compute cash flow from investing activities: This includes any investment made by the company during the period under consideration.
- Compute cash flow from financing activities: This represents inflow/outflow of cash due to financing activities during the period under consideration.
- Sum up all three categories – operating, investing, and financing – to arrive at the total net change in cash for the period.
- Prepare a funds flow statement by showing all sources of fund inflows (operating income proceeds from the sale of assets) against outflows (operating expenses repayment of long-term loans distribution of dividends).
What are the Benefits of a Funds Flow Statement?
A funds flow statement has several benefits for businesses. It helps to:
- Identify the sources of funds: A funds flow statement helps businesses to identify where their funds are coming from, and which activities are generating the most cash flow.
- Identify cash flow issues: By analyzing the statement, businesses can identify any areas where they may be facing cash flow issues and take steps to address them.
- Assess financial position: The statement helps businesses to assess their financial position and determine whether they have the resources to invest in growth or to repay debts.
- Make better financial decisions: By analyzing the statement, businesses can make better financial decisions, such as whether to invest in new equipment or pay off debt.
In conclusion, a funds flow statement is an important tool for businesses to understand their cash flow and financial position. It helps identify the sources and uses of funds and provides valuable information for financial decisions. By preparing and analyzing a funds flow statement, businesses can improve their financial position and ensure long-term success.
Difference between cash flow and funds flow statement
The key differences between the cash flow statement and the funds flow statement are:
Focus: The cash flow statement focuses on cash inflows and outflows, while the funds flow statement focuses on the movement of funds.
Scope: The cash flow statement covers only cash transactions, while the funds flow statement covers all transactions that affect a company’s funds.
Timing: The cash flow statement covers a specific period, while the funds flow statement covers a longer period.
Purpose: The cash flow statement helps to determine a company’s ability to meet its short-term obligations, while the funds flow statement helps to determine a company’s ability to generate internal funds for long-term investments.