State the uses of fund flow statement.
Answers
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Answer:
A fund flow statement reveals the reasons for changes or anomalies in the financial position of a company between two balance sheets. Fund flow statements portray the inflow and outflow of funds - or the sources and applications of funds over a particular period.
Uses:
Share Capital
The very first item on the liabilities side indicates an increase in the owner’s funds, i.e., the Share Capital. An increase in the Share Capital can only be in the case of a fresh issue of shares which here is to the tune of 200. This is a source of the funds for the organisation hence will appear on the sources side of the Funds-Flow Statement.
Reserves and Surplus
Next comes the Reserves and Surplus also having an increase of 125 between the two balance sheet dates. This reflects the retained profits of the organisation which is another source of funds and will appear on the sources side of the Funds-Flow Statement.
Long Term Loans
Moving on, the third item on the Balance Sheet is the Long Term Loans. It shows a decrease in the amount by 100 which can be on account of repayment. This indicates a use of the available funds and hence will be reflected on the uses side of the Statement.
Fixed Assets
The first item on the Assets side of the Balance Sheet shows an increase in the value of the fixed assets. This indicates a fresh purchase of an asset in the current year and thus will be reflected in the uses side of the Funds-Flow Statement.
Current Assets and Current Liabilities
The remaining items on the Balance sheet namely the Current Assets and the Current Liabilities have to be looked at together to get a clear picture regarding the working capital of the organisation. The changes in the working capital also indicate an allocation of the funds available and therefore, a typical Funds-Flow Statement also includes a Statement Showing Change in Working Capital.
STATEMENT SHOWING CHANGE IN WORKING CAPITAL
Particulars 31st March 2020 31st March 2021
Current Assets 375 500
(-) Current Liabilities 200 250
Net Working Capitals 175 250
Increase in Working Capitals 75
The increase in the working capital by 75 shows that the organisation has allocated more money in the working capital and hence this will reflect on the uses side of the Funds-Flow Statement.
Let us now prepare a Funds-Flow Statement for this organisation based on the information derived from the above two Balance Sheets.
FUNDS-FLOW STATEMENT
Sources Rs. Uses Rs.
Fresh Issue of Shares 200 Repayment of loans 100
Retained Earnings 125 Purchase of Fixed Assets 150
Increase in Working Capital 75
325 325
The above statement indicates that while the closing balances of the two years may be 1075 and 1350, the actual flow of funds during the period is to the tune of 325.
The said inflow of 325 is on account of a fresh issue of shares and through retained earnings. However, the same is not reflected as a direct increase in the cash or bank balance of the entity. The uses side of the Statement indicates the areas of allocation of the said funds raised.
This enables the management to track all the funds that have come in and gone out of the organisation.
Another key feature of a financial statement of any organisation is the Cash Flow Statement. It focuses on the actual inflow and outflow of cash from the organisation. It is mainly used to determine the liquidity position of the organisation and thus identify any liquidity problems, if any.
A Funds-Flow Statement on the other hand deals with the long-term nature of the funds, its application as well as the position of the working capital and its impact on the organisation. This further determines the financial situation of the entity and enables a correct allocation of its funds. It is a crucial factor leading to healthy financial planning.