“Funds Flow statement also suffers from window dressing of accounts and hence fails to . give true view of funds movement”. Do you agree with this statement? Give your views.
Answers
Answer:
Funds flow statement is not required under the current accounting standards and hence very few companies provide such statement.
Explanation:
Further, funds flow statement is not free from window dressing since uses only the two principal financial statements. Many organizations prepare funds flow statement for internal purpose and normally it is compared with budgets to set right deviation from budgets.
Funds flow statement is a kind of extension of balance sheet. There are number of similarities between the two statements. Many accounting heads of both statements are common and the only difference is the valuation. while balance sheet shows the figure as on a particular date, funds flow statement shows the period value. While balance sheets values are normally positive, funds flow statement may show negative values on some of the items.
For instance, consider secured loan item of balance sheet. It might show a value of Rs. 200 lakhs last year and Rs. 150 lakhs at the end of current year. Both are positive values. In funds flow statement, the secured loan account will have negative value of Rs. 20 lakhs, since this much of amount is repaid and hence it is application of funds. While balance sheet is a single statement, funds flow is normally prepared in two stages and includes working capital statement. It is generally believed that organisation needs to match assets and liabilities on time scale though assets are always equal to liabilities.
For instance, If a firm raises funds through 364 days commercial paper and uses the money to buy a plant. there is a asset-liability mismatch between the sources and uses of funds. Suppose, the interest rate is 10% and expected return from the project is 12%. Today, the project looks profitable. But what will happen when the interest rate increases to 13% from 10% at the end one year. If the commercial paper is renewed or new commercial paper is substituted For the same, the project profitability turns negative. Further, what is the assurance that the company would be in a position to roll-over the commercial paper or substitute a new paper. If there is delay or difficulty in doing it, it will put lot of pressure on the part of organisation.
Thus, prudential norms require use of long-term funds for long-term purpose and short term funds for short term needs, which is mainly working capital. since it is difficult to exactly match this way, normally, if the flow is from long-term sources to short-term uses, then it is considered to be a good funds management. here again, too much of excessive use of long-term funds for short-term is not good. Funds flow statement shows how efficient the firm is in managing two sources of funds. Funds flow statement is also useful to ascertain whether the firm is liquid or not and whether the firm is in a position to raise funds from operation to sustain its activities. If the firm has set some budgets, which show the funding pattern of further expansion, funds flow statement will be useful to compare whether we are able to achieve the budget terms.
If the funds flow statement is prepared for the future years, then it is possible for the management to plan in advance how to manage the funds and what steps need to be taken today to raise different source of funds. An analysis of working capital statements will be useful to know where the need for working capital arises. Other things being equal, it is desirable to reduce the working capital since investments in working capital yield very low return or zero return. It is also possible to compare this statement with budgets to control the growth of working capital.
Answer: Fund flow statement also suffers from window dressing of accounts , window dressing may make a find more attractive but poor performance cannot be hidden in the long run . Some companies try to manipulate the financial information and the fund flow statements to make the financial disclosure attractive for the external users of the records . The main purpose of window dressing is to show the performance and liquidity position of the company healthier .
Explanation: yes , agree with this statement , as financial institutions often sell their under performing stocks and shares and replace them with well performing stocks by manipulating the fund flow statement .