CASH FLOW STATEMENT:
When I was student of graduate class and I read the basic topic of cash flow statement , I always thought that what is the need of cash flow statement , when we already made final accounts but now when I used cash flow statement in my real life , I have understood that cash flow statement is very necessary and it is main part of accounting statement .
In simple way we can say it tells us cash inflow and cash outflow but in real sense , it is necessary tools of cash’s input and output in any business concern when we compare two or more years total cash flow may be in three type of activities (i)In operating activities from one financial year to another financial year we can get cash from selling of goods , receiving the money or any other operating activities or we can outflow of cash in B/p , creditors or any buying of goods . So different can be said as net flow of operating activities .
(ii) Investing activities
You know very well that with two years any company can buy or sell any assets buying of fixed assets is outflow and selling any asset is inflow of cash difference of both is net cash flow from investing activities .
(iii) Financial activities
Financial activities are related to buying and selling of shares and debentures .Selling of shares and debenture is inflow of cash and opposite if company buys shares of other company , this is called outflow of shares .
After calculating all net inflow and this is called flow of cash and statement making for this is called cash flow statement . >Benefit is it only for cash management who wants to make different planning . An account manager easily calculate what is the real cash flow position . Company’s overall flow of cash is favorable or not . Some time cash book shows good current cash balance but a good account manager should investigate the overall flow of cash before buying high funded assets . This decision should be taken after complete analyzing of cash flow statement . Cash flow statement shows more outflow than inflow this is unbalanced situation .So be careful .
For preparing cash flow statement, we need to calculate cash from operations or cash operating profits. It is main inflow of cash which can be used for working capital. Generally, net profit of business is inflow of cash and net loss is outflow of cash. But it does not mean that cash from operation will always be equal to net profit. Net cash operating profits or loss may be less or more than net profit or loss. It may be possible that company suffered net loss but at that time, company may get net cash operating profits. Main reason of this is some non cash items which we did debit or credit in profit and loss account.
Steps to Calculate Cash from Operations :
There are two main methods of calculating cash from operation :
1st Method : Calculating Cash from operation from cash sales
If we have the information of sales, we can calculate cash from trading operations. Its formula is given below :
Cash from operation = Cash sales - ( Cash purchase + Cash operating expenses )
Or
Cash from operation = Total sales - credit sales - ( total purchase - credit purchase) - ( total expenses - non operating expenses - non cash operating expenses)
2nd Method : Calculation of cash from operation from Net profit or net loss
Under this method, we can calculate cash operating profits or loss with the help of our profit and loss account's net profit or net loss. For this, we have to make a statement for calculating of cash from operations
If you have to use second method, following points must be noted :
i) Outstanding / Accrued Expenses ( Current Year )
Outstanding expenses are those which is payable. So, there is not cash payment of such expenses. So, there is no cash outflow but it is shown in debit side of profit and loss account. That is the reason, we will add it in net profit for calculating cash operating profits. We will add only current year o/s expenses because previous year o/s expenses will be paid current year. So, there is no need to add previous year o/s expenses.
ii) Prepaid Expenses (Previous Year )
We also add prepaid expenses ( Previous year ) in net profit because it is paid in advance in previous year and profit and loss account debited this current year. But according to rule of cash operating profit, this prepaid expenses already was shown as outflow of cash in previous year. That is the reason, we will added it in net profit.
FUNDS FLOW STATEMENT
Before preparing of fund flow statement, you must know different accounting terms in fund flow statement.
Academic need to learn the fund flow statement
1. AS – 3 units 1.
Accounting standard 3 units 1 of Institute of Chartered Accountant of India explains preparation and presentation of statement of changes in financial position or fund flow statement
2. UGC – NET – Commerce
If you want to clear UGC –NET in commerce subject, you should also learn fund flow statement. Because it includes in paper 11 and paper 3 A syllabus in the form of fund flow analysis.
3. Graduate / Post Graduate Classes
Fund flow statement is full subject in B.Com. , B.B.A., B.C.A. and M.Com. , M.B.A., M.C.A. and C.A. classes . For succeeding in these classes, you should know the whole system of fund flow statement.
4. Helpful in Practical business environment
Fund flow statement is very helpful for solving following practical problems of business
Why are current assets are decreasing, even there are high profit?
So, above questions’ answer can be given after making fund flow statements.
Definition of Fund
Fund means working capital. If current assets of company is more than current liability of business, it is called working capital and working capital’s other name is Fund.
Fund = Working capital = Current assets – Current liability
Definition of Flow of Fund
Flow of fund means movement of fund. I take the example of air; we can feel its movement or flow of air. Same thing is happen with fund, due to the activity of business fund is transfer from one asset to another assets. If fixed assets are converted into current asset or fixed liability is converted into current liabilities, these are the flow of fund. But if current assets are changed with current assets or current assets are changed into current liabilities, then, there is no flow of fund because there is no change working capital. Suppose, we get the money from debtor, this is not flow of fund because, working capital is not changed. Both items of current assets and when current assets change into current assets, there will not be change in working capital.
Flow of Fund = Fixed asset changes into current asset or current asset changes into fixed assets
Or
Fixed liability changes into current liability or current liability changes into fixed liability.
Definition of fund flow statement
Fund flow statement is a statement which shows the inflow and out flow of funds between two dates of balance sheet. So, it is known as the statement of changes in financial position. We all know that balance sheet shows our financial position and inflow and outflow of fund affects it. So, in company level business, it is very necessary to prepare fund flow statement to know what the sources are and what are applications of fund between two dates of balance sheet. Generally, it is prepare after getting two year balance sheet.
According to Prof. Anthony, “The funds flow statement describes the sources from which additional funds were derived and the use of which these funds were put.”
Fund flow statements are known with different names
Statement of source and uses of funds
Or summary of financial operations
Movement of working capital statement
Or
Fund received and distributed statement
Or
Fund generated and expended statement.
Steps for making Fund flow statement
First Step
Making of statement of Changes of Working Capital
For making of fund flow statement. It is very necessary to make statement of changes of working capital. Because net increase in working capital is use of fund and net decrease in working capital is source of fund. So, it is duty of accountant to make statement of changes of working capital. Making of statement of changes working capital is very easy and simple.
We take two balance sheets, one is current year balance sheet and other is previous year balance sheet. Then we separate current assets and current liabilities.
If current assets are more than previous year current assets, it means increase in working capital.
If current assets are less than previous year current assets, it means decrease in working capital. Because, relationship between current assets and working capital is positive and if any changes in current assets, working capital will change in same direction.
If current liabilities are more than previous year current liabilities, it means decrease in working capital.
If current liabilities are less than previous year current liabilities, it means increase in working capital. Relationship between working capital and current liabilities are inverse.
Statement or schedule of changes in working capital
----------------------------------------------------------------------------------------
Particular--------------- ↓ previous year ↓ Current year ↓ Effect on working capital
-----------------------------------------------------------------------------------------
-----------------------------------------------------------↓ Increase ↓ Decrease
----------------------------------------------------------------------------------------
Current Assets
Þ Cash in hand
Þ Bills receivable
Þ Sundry debtors
Þ Temporary investments
Þ Stocks / inventories
Þ Prepaid expenses
Þ Accrued incomes
--------------------------------------------------------------------------------------------
Total current assets----------- ↓xxxx ↓ xxxxx↓
----------------------------------------------------------------------- -----------------
Current liabilities
Þ Bills payables
Þ Sundry creditors
Þ Bank overdraft
Þ Short term advances
Þ Dividends payables
Þ Provision for taxation
---------------------------------------------------------------------------------------
Total current Liabilities ----------↓xxxx ↓xxxx ↓
------------------------------------------------------------------ -------------------
Working capital
CA- CL
---------------------------------------------------------------------------
Net increase or decrease in working capital =
Increase in working capital – Decrease in working capital
2nd Step
Statement showing the fund from operation
Because is the source of fund and will show in fund flow statement’s source side. So before making fund flow statement, we must make statement showing the fund from operation.
Operation means business activity and fund from operation means profit from business activity. So, you will easy understand that profit from business activity between two accounting period must be the source of fund.
Statement of fund from operations
------------------------------------------------------------------------------------------
------------------------------------------------------------------------>↓ Amount ↓
-------------------------------------------------------------------------------------------
Closing balance of profit and loss account or retained earning as
Given in the Balance sheet
Add non –fund and non operating items which have been already
Debited to profit and loss account
1. depreciation
2. amortization of fictitious and intangible assets
Þ goodwill
Þ patents
Þ trade marks
Þ preliminary expenses
Þ discount on issue of shares
3. Appropriation of retained earning such as
Þ Transfer to general reserve
Þ Dividend equalization fund
Þ Transfer to sinking fund
Þ Contingency reserve etc.
4. Loss on sale of any non current or fixed assets such as
Þ Loss on sale of land and building
Þ Loss on sale of machinery
Þ Loss on sale of furniture
Þ Loss on sale of long term investments
5. Dividends including
Þ Interim dividend
Þ Proposed dividend
(If it is an appropriation of profit and not taken as current liability)
6. Provision for taxation (if it is not taken as current liability)
7. Any other non fund / non operating items which have been debited to P/L account
-----------------------------------------------------------------------------------
Total ( A)-------------------------------------------------------> ↓ XXXXX ↓
-------------------------------------------------------------------------------------
Less Non –Fund or non operating items which have already been credited to profit and loss account
1. Profit or gain from the sale of non current / fixed assets such as
Þ Profit on sale of land and building
Þ Profit on sale of plant and machinery
Þ Profit on sale of long term investment etc.
2. Appreciation in the value of fixed assets such as increase in the value of land if it has been credited to profit and loss account
3. Dividends received
4. excess provision retransferred to profit and loss account or written back .
5. any other non operating item which has been credited to profit and loss account
6. opening balance of profit and loss account or retained earnings as given in the balance sheet
-------------------------------------------------------------------------------------
Total ( B)--------------------------------------------------------------> ↓ XXXXX ↓
----------------------------------------------------------------------------------------
Funds received from operation or business activities = total ( A) – Total ( B)
You can make also above statement in t shape adjusted profit and loss account form .
3rd Step
Fund flow statement
--------------------------------------------------------------------------------------
-------------------------------------------------------------------> ↓ Amount ↓
-------------------------------------------------------------------------------------
A ) Source of funds
3. redemption of debentures
4. repayment of long term loans
5. purchase of long term loans
6. purchase of long term investments
7. non trading payments
8. payment of tax
9. payment of dividends
10. increase in working capital ( As per positive balance of ist step )
-------------------------------------------------------------------------------------
total --------------------------------------------------------> ↓ XXXXX ↓
--------------------------------------------------------------------------------------
FUNDS FLOW ANALYSIS IMPORTANCE:
Fund flow analysis is important tool of financial analysis. It is also significant for financial management. Today, financial analysts, credit providing agencies and financial managers use it at large scale. Fund flow analysis's main aim is to check the changes in fund andworking capital between two financial periods. Fund flow analysis is also helpful for making projected funds flow statement and make the better plan for needed fund.
With following advantages of fund flow analysis, we can find the importance of fund flow analysis.
1. It helps in the analysis of financial positions
We know the financial statement shows the net effect of all the transactions on the financial position of company. Balance sheet is also only show the picture of our current financial position on a specific date. But these financial statement does not show the reasons of differences in the assets and liabilities between two financial period. In fund flow analysis, we make the fund flow statement for knowing the reasons of changing in the assets and liabilities. Sometime, we have good financial performance but we have using our fund in bad area. All these reasons can come only analysis of fund flow statement.
2. It throws light on perplexing questions
Fund flow analysis does not only throw the light on perplexing questions but it helps us to solve such questions. These questions are :
a) Why are our net current assets decreasing even after obtaining higher profit?
b) Why did we not issue the dividend when we have high profit level?
c) What happened with our net profit, whether did it go?
d) What happened the money which we have obtained after sales of shares, debentures and other fixed assets?
e) What are the main resources of redemption of debts?
3. It helps in the formation of a realistic dividend policy
Fund flow analysis is helpful for formation of a realistic dividend policy. Net profit is also a source of fund. Fund flow analysis can tell where are we using this fund. On the analysis, we can decide how much rest fund can be used for providing the dividend to the shareholders.
4. It helps in the proper allocation of resources
Sources of funds are limited if we have good monitoring capacity to check the application of fund, we can use our limited resources better way. It can only be possible with fund flow analysis.
5. It helps in appraising the use of working capital
Working capital is the life blood of business. If we use it efficiently, we can grow our business. In fund flow statement, we learn to check the main changes in working capital and its analysis helps us to know where did we do mistake in using of working capital. So, fund flow analysis are helpful in appraising the use of working capital.
6. It acts as a future guide
Fund flow analysis acts as our future guide because it guides to solve the problems which will arise due to shortage of our fund. Organisation can manage their fund proper way if it has done the analysis proper way.
7. It helps in knowing the overall credit worthiness of a firm
Every bank demands the fund flow statements of past years. All fund flow statements are analyzed under a systematic way and with the team. On this basis, loan are given. If bank finds that company has misused the fund, then they stop to give loan to such company.
When I was student of graduate class and I read the basic topic of cash flow statement , I always thought that what is the need of cash flow statement , when we already made final accounts but now when I used cash flow statement in my real life , I have understood that cash flow statement is very necessary and it is main part of accounting statement .
In simple way we can say it tells us cash inflow and cash outflow but in real sense , it is necessary tools of cash’s input and output in any business concern when we compare two or more years total cash flow may be in three type of activities (i)In operating activities from one financial year to another financial year we can get cash from selling of goods , receiving the money or any other operating activities or we can outflow of cash in B/p , creditors or any buying of goods . So different can be said as net flow of operating activities .
(ii) Investing activities
You know very well that with two years any company can buy or sell any assets buying of fixed assets is outflow and selling any asset is inflow of cash difference of both is net cash flow from investing activities .
(iii) Financial activities
Financial activities are related to buying and selling of shares and debentures .Selling of shares and debenture is inflow of cash and opposite if company buys shares of other company , this is called outflow of shares .
After calculating all net inflow and this is called flow of cash and statement making for this is called cash flow statement . >Benefit is it only for cash management who wants to make different planning . An account manager easily calculate what is the real cash flow position . Company’s overall flow of cash is favorable or not . Some time cash book shows good current cash balance but a good account manager should investigate the overall flow of cash before buying high funded assets . This decision should be taken after complete analyzing of cash flow statement . Cash flow statement shows more outflow than inflow this is unbalanced situation .So be careful .
For preparing cash flow statement, we need to calculate cash from operations or cash operating profits. It is main inflow of cash which can be used for working capital. Generally, net profit of business is inflow of cash and net loss is outflow of cash. But it does not mean that cash from operation will always be equal to net profit. Net cash operating profits or loss may be less or more than net profit or loss. It may be possible that company suffered net loss but at that time, company may get net cash operating profits. Main reason of this is some non cash items which we did debit or credit in profit and loss account.
Steps to Calculate Cash from Operations :
There are two main methods of calculating cash from operation :
1st Method : Calculating Cash from operation from cash sales
If we have the information of sales, we can calculate cash from trading operations. Its formula is given below :
Cash from operation = Cash sales - ( Cash purchase + Cash operating expenses )
Or
Cash from operation = Total sales - credit sales - ( total purchase - credit purchase) - ( total expenses - non operating expenses - non cash operating expenses)
2nd Method : Calculation of cash from operation from Net profit or net loss
Under this method, we can calculate cash operating profits or loss with the help of our profit and loss account's net profit or net loss. For this, we have to make a statement for calculating of cash from operations
If you have to use second method, following points must be noted :
i) Outstanding / Accrued Expenses ( Current Year )
Outstanding expenses are those which is payable. So, there is not cash payment of such expenses. So, there is no cash outflow but it is shown in debit side of profit and loss account. That is the reason, we will add it in net profit for calculating cash operating profits. We will add only current year o/s expenses because previous year o/s expenses will be paid current year. So, there is no need to add previous year o/s expenses.
ii) Prepaid Expenses (Previous Year )
We also add prepaid expenses ( Previous year ) in net profit because it is paid in advance in previous year and profit and loss account debited this current year. But according to rule of cash operating profit, this prepaid expenses already was shown as outflow of cash in previous year. That is the reason, we will added it in net profit.
FUNDS FLOW STATEMENT
Before preparing of fund flow statement, you must know different accounting terms in fund flow statement.
Academic need to learn the fund flow statement
1. AS – 3 units 1.
Accounting standard 3 units 1 of Institute of Chartered Accountant of India explains preparation and presentation of statement of changes in financial position or fund flow statement
2. UGC – NET – Commerce
If you want to clear UGC –NET in commerce subject, you should also learn fund flow statement. Because it includes in paper 11 and paper 3 A syllabus in the form of fund flow analysis.
3. Graduate / Post Graduate Classes
Fund flow statement is full subject in B.Com. , B.B.A., B.C.A. and M.Com. , M.B.A., M.C.A. and C.A. classes . For succeeding in these classes, you should know the whole system of fund flow statement.
4. Helpful in Practical business environment
Fund flow statement is very helpful for solving following practical problems of business
Why are current assets are decreasing, even there are high profit?
- Why did Company not issue dividend, even company has obtained profit?
- What happened with net profit, where did it go?
- What did Company do with the fund received from selling of shares and debentures?
So, above questions’ answer can be given after making fund flow statements.
Definition of Fund
Fund means working capital. If current assets of company is more than current liability of business, it is called working capital and working capital’s other name is Fund.
Fund = Working capital = Current assets – Current liability
Definition of Flow of Fund
Flow of fund means movement of fund. I take the example of air; we can feel its movement or flow of air. Same thing is happen with fund, due to the activity of business fund is transfer from one asset to another assets. If fixed assets are converted into current asset or fixed liability is converted into current liabilities, these are the flow of fund. But if current assets are changed with current assets or current assets are changed into current liabilities, then, there is no flow of fund because there is no change working capital. Suppose, we get the money from debtor, this is not flow of fund because, working capital is not changed. Both items of current assets and when current assets change into current assets, there will not be change in working capital.
Flow of Fund = Fixed asset changes into current asset or current asset changes into fixed assets
Or
Fixed liability changes into current liability or current liability changes into fixed liability.
Definition of fund flow statement
Fund flow statement is a statement which shows the inflow and out flow of funds between two dates of balance sheet. So, it is known as the statement of changes in financial position. We all know that balance sheet shows our financial position and inflow and outflow of fund affects it. So, in company level business, it is very necessary to prepare fund flow statement to know what the sources are and what are applications of fund between two dates of balance sheet. Generally, it is prepare after getting two year balance sheet.
According to Prof. Anthony, “The funds flow statement describes the sources from which additional funds were derived and the use of which these funds were put.”
Fund flow statements are known with different names
Statement of source and uses of funds
Or summary of financial operations
Movement of working capital statement
Or
Fund received and distributed statement
Or
Fund generated and expended statement.
Steps for making Fund flow statement
First Step
Making of statement of Changes of Working Capital
For making of fund flow statement. It is very necessary to make statement of changes of working capital. Because net increase in working capital is use of fund and net decrease in working capital is source of fund. So, it is duty of accountant to make statement of changes of working capital. Making of statement of changes working capital is very easy and simple.
We take two balance sheets, one is current year balance sheet and other is previous year balance sheet. Then we separate current assets and current liabilities.
If current assets are more than previous year current assets, it means increase in working capital.
If current assets are less than previous year current assets, it means decrease in working capital. Because, relationship between current assets and working capital is positive and if any changes in current assets, working capital will change in same direction.
If current liabilities are more than previous year current liabilities, it means decrease in working capital.
If current liabilities are less than previous year current liabilities, it means increase in working capital. Relationship between working capital and current liabilities are inverse.
Statement or schedule of changes in working capital
----------------------------------------------------------------------------------------
Particular--------------- ↓ previous year ↓ Current year ↓ Effect on working capital
-----------------------------------------------------------------------------------------
-----------------------------------------------------------↓ Increase ↓ Decrease
----------------------------------------------------------------------------------------
Current Assets
Þ Cash in hand
Þ Bills receivable
Þ Sundry debtors
Þ Temporary investments
Þ Stocks / inventories
Þ Prepaid expenses
Þ Accrued incomes
--------------------------------------------------------------------------------------------
Total current assets----------- ↓xxxx ↓ xxxxx↓
----------------------------------------------------------------------- -----------------
Current liabilities
Þ Bills payables
Þ Sundry creditors
Þ Bank overdraft
Þ Short term advances
Þ Dividends payables
Þ Provision for taxation
---------------------------------------------------------------------------------------
Total current Liabilities ----------↓xxxx ↓xxxx ↓
------------------------------------------------------------------ -------------------
Working capital
CA- CL
---------------------------------------------------------------------------
Net increase or decrease in working capital =
Increase in working capital – Decrease in working capital
2nd Step
Statement showing the fund from operation
Because is the source of fund and will show in fund flow statement’s source side. So before making fund flow statement, we must make statement showing the fund from operation.
Operation means business activity and fund from operation means profit from business activity. So, you will easy understand that profit from business activity between two accounting period must be the source of fund.
Statement of fund from operations
------------------------------------------------------------------------------------------
------------------------------------------------------------------------>↓ Amount ↓
-------------------------------------------------------------------------------------------
Closing balance of profit and loss account or retained earning as
Given in the Balance sheet
Add non –fund and non operating items which have been already
Debited to profit and loss account
1. depreciation
2. amortization of fictitious and intangible assets
Þ goodwill
Þ patents
Þ trade marks
Þ preliminary expenses
Þ discount on issue of shares
3. Appropriation of retained earning such as
Þ Transfer to general reserve
Þ Dividend equalization fund
Þ Transfer to sinking fund
Þ Contingency reserve etc.
4. Loss on sale of any non current or fixed assets such as
Þ Loss on sale of land and building
Þ Loss on sale of machinery
Þ Loss on sale of furniture
Þ Loss on sale of long term investments
5. Dividends including
Þ Interim dividend
Þ Proposed dividend
(If it is an appropriation of profit and not taken as current liability)
6. Provision for taxation (if it is not taken as current liability)
7. Any other non fund / non operating items which have been debited to P/L account
-----------------------------------------------------------------------------------
Total ( A)-------------------------------------------------------> ↓ XXXXX ↓
-------------------------------------------------------------------------------------
Less Non –Fund or non operating items which have already been credited to profit and loss account
1. Profit or gain from the sale of non current / fixed assets such as
Þ Profit on sale of land and building
Þ Profit on sale of plant and machinery
Þ Profit on sale of long term investment etc.
2. Appreciation in the value of fixed assets such as increase in the value of land if it has been credited to profit and loss account
3. Dividends received
4. excess provision retransferred to profit and loss account or written back .
5. any other non operating item which has been credited to profit and loss account
6. opening balance of profit and loss account or retained earnings as given in the balance sheet
-------------------------------------------------------------------------------------
Total ( B)--------------------------------------------------------------> ↓ XXXXX ↓
----------------------------------------------------------------------------------------
Funds received from operation or business activities = total ( A) – Total ( B)
You can make also above statement in t shape adjusted profit and loss account form .
3rd Step
Fund flow statement
--------------------------------------------------------------------------------------
-------------------------------------------------------------------> ↓ Amount ↓
-------------------------------------------------------------------------------------
A ) Source of funds
- fund from operation ( balance of second step )
- issue of shares capital
- issue of debentures
- raising of long term loans
- receipts from partly paid shares , called up
- amount received from sales of non current or fixed assets
- non trading receipts such as dividend received
- sale of investments ( Long term )
- decrease in working capital as per schedule of changes in working capital
----------------------------------------------------------------------------------
total -------------------------------------------------------------> ↓ XXXXX ↓
---------------------------------------------------------------------------------
Applications or uses of funds
1. Funds lost in operations ( Balance negative in second step )
3. redemption of debentures
4. repayment of long term loans
5. purchase of long term loans
6. purchase of long term investments
7. non trading payments
8. payment of tax
9. payment of dividends
10. increase in working capital ( As per positive balance of ist step )
-------------------------------------------------------------------------------------
total --------------------------------------------------------> ↓ XXXXX ↓
--------------------------------------------------------------------------------------
FUNDS FLOW ANALYSIS IMPORTANCE:
Fund flow analysis is important tool of financial analysis. It is also significant for financial management. Today, financial analysts, credit providing agencies and financial managers use it at large scale. Fund flow analysis's main aim is to check the changes in fund andworking capital between two financial periods. Fund flow analysis is also helpful for making projected funds flow statement and make the better plan for needed fund.
With following advantages of fund flow analysis, we can find the importance of fund flow analysis.
1. It helps in the analysis of financial positions
We know the financial statement shows the net effect of all the transactions on the financial position of company. Balance sheet is also only show the picture of our current financial position on a specific date. But these financial statement does not show the reasons of differences in the assets and liabilities between two financial period. In fund flow analysis, we make the fund flow statement for knowing the reasons of changing in the assets and liabilities. Sometime, we have good financial performance but we have using our fund in bad area. All these reasons can come only analysis of fund flow statement.
2. It throws light on perplexing questions
Fund flow analysis does not only throw the light on perplexing questions but it helps us to solve such questions. These questions are :
a) Why are our net current assets decreasing even after obtaining higher profit?
b) Why did we not issue the dividend when we have high profit level?
c) What happened with our net profit, whether did it go?
d) What happened the money which we have obtained after sales of shares, debentures and other fixed assets?
e) What are the main resources of redemption of debts?
3. It helps in the formation of a realistic dividend policy
Fund flow analysis is helpful for formation of a realistic dividend policy. Net profit is also a source of fund. Fund flow analysis can tell where are we using this fund. On the analysis, we can decide how much rest fund can be used for providing the dividend to the shareholders.
4. It helps in the proper allocation of resources
Sources of funds are limited if we have good monitoring capacity to check the application of fund, we can use our limited resources better way. It can only be possible with fund flow analysis.
5. It helps in appraising the use of working capital
Working capital is the life blood of business. If we use it efficiently, we can grow our business. In fund flow statement, we learn to check the main changes in working capital and its analysis helps us to know where did we do mistake in using of working capital. So, fund flow analysis are helpful in appraising the use of working capital.
6. It acts as a future guide
Fund flow analysis acts as our future guide because it guides to solve the problems which will arise due to shortage of our fund. Organisation can manage their fund proper way if it has done the analysis proper way.
7. It helps in knowing the overall credit worthiness of a firm
Every bank demands the fund flow statements of past years. All fund flow statements are analyzed under a systematic way and with the team. On this basis, loan are given. If bank finds that company has misused the fund, then they stop to give loan to such company.
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