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Q.
Ans. Meaning of Fund Flow Statement : The balance sheet of a firm discloses
the position of assets, liabilities and capital at the end of a particular year. But
it does not disclose the causes of changes in these items between the end of
previous year and the end of current year. Therefore, an additional statement
called Fund Flow Statement is prepared to show the changes in assets,
liabilities and capital between the dates of two balance sheets.
Meaning of Funds : In a limited sense, the term fund means cash. But this
is not the correct meaning of the term fund because there are many
transactions in the business which do not result in inflow or outflow of cash but
certainly result in the inflow or outflow of funds. As such, the term fund stands
for Net Working Capital.
Meaning of Flow : The term flow means change or movement. Therefore, the
term Flow of Funds means increase or decrease in working capital. If a
transaction results in the increase of working capital, it is said to be a source of
funds and if the transaction results in the decrease of working capital, it is said
to be an application of funds. If the transaction does not result in any change in
the working capital, it is said that it does not result in the flow of fund.
Preparation of Fund Flow Statement : For preparing Fund Flow Statement
we have to prepare the following three statements:
(1)
Current Assets:
Cash-in-hand
Cash at Bank
Debtors
Closing Stock
Short Term
investments
Bills Receivables
Prepaid Expenses
Other current assets
Amount
As on
..
Amount
As on
..
________
________
Increase in
Working
Capital
Decrease in
Working
Capital
________
________
________
________
________
________
________
________
Depreciation.
Goodwill written off.
Preliminary Expenses.
Patent Rights, Trade Marks and Copy Rights.
Discount on issue of Debentures & Shares.
Deferred Revenue Expenditure such as,
Advertisement Suspense A/c.
Amount
(ii)
Applications of Funds
1.
2.
Issue of Shares
Q.
3.
Issue of Debentures
3. Redemption of Debentures
4.
5.
6.
Non-Trading Receipts
6. Non-Trading Payments
What is Fund Flow Statement? What are the uses and Limitations of
Fund Flow Statement?
Ans. Meaning of Fund Flow Statement : The balance sheet of a firm discloses
the position of assets, liabilities and capital at the end of a particular year. But
it does not disclose the causes of changes in these items between the end of
previous year and the end of current year. Therefore, an additional statement
called Fund Flow Statement is prepared to show the changes in assets,
liabilities and capital between the dates of two balance sheets.
Uses of Fund Flow Statement :
1.
What have been the main sources and applications of funds during
the period?
How much funds have been generated from business operations?
Where did the profits go?
Why are dividends not larger?
How was the expansion in plant and Equipment financed?
How was the repayment of long term debt accomplished?
How was the increase in Working Capital financed?
2.
3.
4.
It enables to know whether the funds have been properly used : The
fund flow statement enables the management to know whether the funds
have been properly used in purchasing various assets or repaying loans
etc.
5.
6.
Help in the presentation of Budget for the next period : If a fund flow
statement is prepared for next year, it will enable the management to plan
its financial resources properly. The firm will know how much funds it
requires, how much the firm can manage internally and how much it
should arrange from outside source. This is helpful in preparing the
budgets for the future period.
7.
1.
2.
It reveals only the changes in working capital and does not show the
changes in cash position.
3.
4.
Since it is based on opening and closing balance sheets and the profit and
loss account, it is not an original statement.
Q.
Particulars
Amount
.............
.............
.............
________
.............
.............
________
(.............)
(.............)
________
.............
(.............)
Amount
________
.............
.............
________
.............
Interest received
Dividend received
Net Cash from Investing Activities
(.............)
.............
(.............)
.............
.............
.............
________ .............
.............
.............
(.............)
(.............)
(.............)
_________ .............
________
.............
.............
________
.............
________
1.
2.
3.
4.
It explains the deviation of cash from earnings : A firm may earn huge
profits yet it may have paucity of cash or when it suffered a loss it may still
have plenty of cash. A cash flow statement explains the reasons for it.
5.
6.
It does not present true picture of the liquidity of a firm because the
liquidity does not depend upon cash alone.
2.
3.
4.
It is prepared on cash basis and hence ignores one of the basis concepts of
accounting, namely accrual concept.
Q.
Ans. Distinction between Fund Flow Statement and Cash Flow Statement:
BASIS
FUND FLOW
STATEMENT
CASH FLOW
STATEMENT
1. Basis of
Analysis
It discloses the
cause of changes
in cash position.
2. Interpretation
3. Difference in
the method of
preparation
4. Usefulness
5. Schedule of
Changes in
Working Capital
Schedule of changes in
working capital is also
preparing to study the
changes in current assets
and current liabilities.
No separate
schedule is
prepared with the
cash flow statement
as the changes in
current assets and
current liabilities
are shown by way of
adjustment in profit
to arrive at cash
flow from operating
activities.
6. Opening &
closing Balance
of Cash
7. Principles of
Accounting
Q.
This is prepared on
cash basis of
accounting.
INCOME
STATEMENT
1. Nature
It discloses net
profit or net loss
made during
the year.
2. Items
3. Objects
It is prepared to
ascertain the net
results of business
operations.
4. Optional or
Compulsory
Preparation of
income statement is
compulsory and the
contents of income
statement must be
in accordance with
requirements of law.
5. Help
Funds flow
statement doesnt
help the
preparation of
income statement.
6. Scope
Q.
It is of utmost
important because
it depicts the result
of all financial
transactions of a
particular period.
BASIS
BALANCE SHEET
1. Nature
It is a statement of
assets and liabilities
at appoint of time.
2. Items
3. Use
It is a tool of management
techniques and is used by the
management for future
financial planning and budget
formation.
4.Optional or
Compulsory
Preparation and
publication of
Balance Sheet is
compulsory and it
is prepared in its
prescribed form.
5. Basis of
preparation
6. Scope
It is so important
because it shows
the financial
position of the
business.
7. Term
It is an yearly affair
throughout the
whole life of the
business.