Difference Advantage Disadvantage and Uses of
Cash Flow Statement & Funds Flow Statement
There are 3 basic financial statements
that exist in the area of Financial Management.
1. Balance Sheet.
2. Income Statement.
3. Cash Flow Statement.
4. Fund Flow Statement
The first two statements measure one aspect of performance of the
business over a period of time. Cash flow statements signify the
changes in the cash and cash equivalents of the business due to the business
operations in one time period. Funds flow statements report changes
in a business's working capital from its operations in a single time period,
but have largely been superseded by cash flow statements.
A Cash Flow Statement
is a statement showing changes in cash position of the firm from one period to
another. It explains the inflows (receipts) and outflows (disbursements) of
cash over a period of time. The inflows of cash may occur from sale of goods,
sale of assets, receipts from debtors, interest, dividend, rent, issue of new
shares and debentures, raising of loans, short-term borrowing, etc. The cash
outflows may occur on account of purchase of goods, purchase of assets, payment
of loans loss on operations, payment of tax and dividend, etc.
A cash flow statement is different from a cash budget. A cash flow
statement shows the cash inflows and outflows which have already taken place
during a past time period. On the other hand a cash budget shows cash inflows
and outflows which are expected to take place during a future time period. In
other words, a cash budget is a projected
cash flow statement.
Funds Flow Statement states the changes
in the working capital of the business in relation to the operations in one
time period.
The main components of Working Capital are:
Current Assets
1.
Cash
2.
Receivables
3.
Inventory
Current Liabilities
1.
Payables
Net working capital is the total change in the business's working
capital, calculated as total change in current assets minus total change in
current liabilities.
FOR EXAMPLE: If the inventory of
the business increased from Rs 1,40,000 to Rs 1,60,000, then this increase of
Rs 20,000 is the increase in the working capital for the corresponding period
and will be mentioned on the funds flow statement. But the same would not
be reflected in the cash flow statement as it does not involve cash.
So the Fund Flow Statement uses all the above four components and shows
the change in them. While a cash flow statement only shows the change in cash
position of the business.
Cash flow statements have largely superseded funds flow statements as
measurements of a business's liquidity because cash and cash equivalents are
more liquid than all other current assets included in working capital's
calculation.
What is Included in a Cash Flow Statement?
The statement of cash flows uses information from the other two
statements (Income Statement and Balance Sheet) to indicate cash inflows and
outflows.
A Cash Flow Statement comprises information on following 3 activities:
1. Operating Activities
2. Investing Activities
3. Financing Activities
1. Operating Activities: Operating activities
include cash flows from all standard business operations. Cash receipts from
selling goods and services represent the
inflows. The revenues from interest and dividends are also included
here. The operational expenditures are considered as outflows for this section.
Although interest expenses fall under this section but the dividends are not
included .Dividends are considered as a part of financing activity in financial
accounting terms.
2. Investing
Activities: Investing activities include transactions with assets, marketable
securities and credit instruments. The sale of property, plant and equipment or
marketable securities is a cash inflow. Purchasing property, plant and
equipment or marketable securities are considered as cash outflows. Loans made
to borrowers for long-term use is another cash outflow. Collections from these
loans, however, are cash inflows.
3. Financing
Activities: Financing activities on the statement of cash flows are much more
defined in nature. The receipts come from borrowing money or issuing stock. The
outflows occur when a company repays loans, purchases treasury stock or pays
dividends to stockholders. As the case with other activities on the statement
of cash flows depend on activities rather than actual general ledger
accounts.
Table of Difference between Funds Flow Statement and Cash Flow Statement
|
Basis of Difference
|
Funds Flow Statement
|
Cash Flow Statement
|
|
1.
|
Basis of Analysis
|
Funds flow statement is based on broader concept
i.e. working capital.
|
Cash flow statement is based on narrow concept
i.e. cash, which is only one of the elements of working capital.
|
|
2.
|
Source
|
Funds flow statement tells about the various
sources from where the funds generated with various uses to which they are
put.
|
Cash flow statement stars with the opening
balance of cash and reaches to the closing balance of cash by proceeding
through sources and uses.
|
|
3.
|
Usage
|
Funds flow statement is more useful in assessing
the long-range financial strategy.
|
Cash flow statement is useful in understanding
the short-term phenomena affecting the liquidity of the business.
|
|
4.
|
Schedule of Changes in Working Capital
|
In funds flow statement changes in current assets
and current liabilities are shown through the schedule of changes in working capital.
|
In cash flow statement changes in current assets
and current liabilities are shown in the cash flow statement itself.
|
|
5.
|
End Result
|
Funds flow statement shows the causes of changes
in net working capital.
|
Cash flow statement shows the causes the changes
in cash.
|
|
6.
|
Principal of Accounting
|
Funds flow statement is in alignment with the
accrual basis of accounting.
|
In cash flow statement data obtained on accrual
basis are converted into cash basis.
|
Advantages of Cash Flow Statement
1. It shows the actual cash position available with the
company between the two balance sheet dates which funds flow and profit and
loss account are unable to show. So it is important to make a cash flow report
if one wants to know about the liquidity position of the company.
2. It helps the company in accurately
projecting the future liquidity position of the company enabling
it arrange for any shortfall in money by arranging
finance in advance and if there is excess than it can help the company in
earning extra return by deploying excess funds.
3. It acts like a filter and is used by many analyst
and investors to judge whether company has prepared the financial statements
properly or not because if there is any discrepancy in the cash position as
shown by balance sheet and the cash flow statement, it means that statements
are incorrect.
Disadvantages of Cash Flow Statement
1. Since it shows only cash
position, it is not possible to deduce actual profit and loss of the company by
just looking at this statement.
2. In isolation this is of no use
and it requires other financial statements like balance sheet, profit and loss
etc…, and therefore limiting its use.
Advantages of Fund Flow Statements
A Funds flow
statement is prepared to show changes in the assets, liabilities and equity
between two balance sheet dates, it is also called statement of sources and
uses of funds. The advantages of such a financial statement are many fold.
Some of these are:
1. Funds flow statement reveals the net result of
Business operations done by the company during the year.
2. In addition to the balance sheet, it serves as an
additional reference for many interested parties like analysts, creditors,
suppliers, government to look into financial position of the company.
3. The Fund Flow Statement shows how the funds were
raised from various sources and also how those funds were deployed by a
company, therefore it is a great tool for management when it wants to know
about where and from what sources funds were raised and also how those funds
got utilized into the business.
4. It reveals the causes for the changes in liabilities
and assets between the two balance sheet dates therefore providing a detailed
analysis of the balance sheet of the company.
5. Funds flow statement helps the management in
deciding its future course of plans and also it acts as a control tool for the
management.
6. Funds flow statement should not be looked alone
rather it should be used along with balance sheet in order judge the financial position of the company in a
better way.
Disadvantages of Fund Flow Statements
Funds flow statement has many advantages; however it has
some disadvantages or limitations also.
Let’s look at some of
the limitations of funds flow statement.
1. Funds Flow statement has to be
used along with balance sheet and profit and loss account for inference of
financial strengths and weakness of a company it cannot be used alone.
2. Fund Flow Statement does not reveal the cash
position of the company, and that is why company has to prepare cash flow
statement in addition to funds flow statement.
3. Funds flow statement only
rearranges the data which is there in the books of account and therefore it
lacks originality. In simple words it presents the data in the financial statements
in systematic way and therefore many companies tend to avoid preparing funds
flow statements.
4. Funds flow statement is basically historic in nature,
that is it indicates what happened in the past and it does not communicate
anything about the future, only estimates can be made based on the past data
and therefore it cannot be used the management for taking decision related to
future.
We can conclude that shorter the planning period more relevant is the
“Cash Flow Statement and longer the planning period more relevant is the “Fund
Flow Statement”
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