Implication of Fund Flow Statement And Cash Flow Statement

Rakshit Jargad Roll no: 24 TYBBI

Implication of Cash Flow Statement

A cash flow statement is a financial report that describes the sources of a company's cash and how that cash was spent over a specified time period. It does not include noncash items such as depreciation. This makes it useful for determining the short-term viability of a company, particularly its ability to pay bills. Because the management of cash flow is so crucial for businesses and small businesses in particular, most analysts recommend that an entrepreneur study a cash flow statement at least every quarter. The cash flow statement is similar to the income statement in that it records a company's performance over a specified period of time. The difference between the two is that the income statement also takes into account some non-cash accounting items such as depreciation. The cash flow statement strips away all of this and shows exactly how much actual money the company has generated. Cash flow statements show how companies have performed in managing inflows and outflows of cash. It provides a sharper picture of a company's ability to pay creditors, and finance growth. It is perfectly possible for a company that is shown to be profitable according to accounting standards to go under if there isn't enough cash on hand to pay bills. Comparing amount of cash generated to outstanding debt, known as the "operating cash flow ratio," illustrates the company's ability to service its loans and interest payments. If a slight drop in a company's quarterly cash flow would jeopardize its ability to make loan payments, that company is in a riskier position than one with less net income but a stronger cash flow level. Unlike the many ways in which reported earnings can be presented, there is little a company can do to manipulate its cash situation. Barring any outright fraud, the cash flow statement tells the whole story. The company either has cash or it does not. Analysts will look closely at the cash flow statement of any company in order to understand its overall health. Three Sections of the Cash Flow Statement Companies produce and consume cash in different ways, so the cash flow statement is divided into three sections: cash flows from operations, financing and investing. Basically, the sections on operations and financing show how the company gets its cash, while the investing section shows how the company spends its cash. (To continue learning about cash flow, see The Essentials Of Cash Flow, Operating Cash Flow: Better Than Net Income? and What Is A Cash Flow Statement?)

Cash Flows from Operating Activities This section shows how much cash comes from sales of the company's goods and services, less the amount of cash needed to make and sell those goods and services. Investors tend to prefer companies that produce a net positive cash flow from operating activities. High growth companies, such as technology firms, tend to show negative cash flow from operations in their formative years. At the same time, changes in cash flow from operations typically offer a preview of changes in net future income. Normally it's a good sign when it goes up. Watch out for a widening gap between a company's reported earnings and its cash flow from operating activities. If net income is much higher than cash flow, the company may be speeding or slowing its booking of income or costs.

Cash Flows from Investing Activities This section largely reflects the amount of cash the company has spent on capital expenditures, such as new equipment or anything else that needed to keep the business going. It also includes acquisitions of other businesses and monetary investments such as money market funds.

You want to see a company re-invest capital in its business by at least the rate of depreciation expenses each year. If it doesn't re-invest, it might show artificially high cash inflows in the current year which may not be sustainable.

Cash Flow From Financing Activities This section describes the goings-on of cash associated with outside financing activities. Typical sources of cash inflow would be cash raised by selling stock and bonds or by bank borrowings. Likewise, paying back a bank loan would show up as a use of cash flow, as would dividend payments and common stock repurchases.

Implication of Fund Flow Statement

A report on the movement of funds or working capital. In a narrow sense the term fund means cash and the fund flow statement depicts the cash receipts and cash disbursements/ payments. It highlights the changes in the cash receipts and payments as a cash flow statement in addition to the cash balances i.e., opening cash balance and closing cash balance. Contrary to the earlier, the fund means working capital i.e., the differences between the current assets and current liabilities.

The term flow denotes the change. Flow of funds means the change in funds or in working capital. The change on the working capital leads to the net changes taken place on the working capital i.e., especially due to either increase or decrease in the working capital. The change in the volume of the working capital due to numerous transactions. Some of the transactions may lead to increase or decrease the volume of working capital. Some other transactions neither registers an increase nor decrease in the volume of working capital.

The utility of this statement can be measured on the basis of its contributions to the financial management. It generally serves the following purposes:(1) Analysis of Financial Position. The basic purpose of preparing the statement is to have a rich into the financial operations of the concern. It analyses how the funds were obtained and used in the past. In this sens, it is a valuable tool for the finance manager for analyzing the past and future plans of the firm and their impact on the liquidity. He can deduce the reasons for the imbalances in uses of funds in the past an take necessary corrective actions. In analyzing the financial position of the firm, the Funds Flow Statement answers to such questions as1. Why were the net current assets of the firm down, though the net income was up or vice versa? 2. How was it possible to distribute dividends in absence of or in excess of current income for the period ? 3. How was the sale proceeds of plant and machinery used ? 4. How was the sale proceeds of plant and machinery used ? 5. How were the debts retired ? 6. What became to the proceeds of share issue or debenture issue ?

7. How was the increase in working capital financed ? 8. Where did the profits go?

Though it is not an easy job to find the definite answerers to such questions because funds derived from a particular source re rarely used for a particular purpose. However, certain useful assumptions can often be made and reasonable conclusions are usually not difficult to arrive at.

(2) Evaluation of the Firm's Financing. One important use of the statement is that it evaluates the firm' financing capacity. The analysis of sources of funds reveals how the firm's financed its development projects in the past i.e., from internal sources or from external sources. It also reveals the rate of growth of the firm.

(3) An Instrument for Allocation of Resources. In modern large scale business, available funds are always short for expansion programmes and there is always a problem of allocation of resources. It is, therefore, a need of evolving an order of priorities for putting through their expansion programmes which are phased accordingly, and funds have to be arranged as different phases of programmes get into their stride. The amount of funds to be available for these projects shall be estimated by the finance with the help of Funds Flow Statement. This prevents the business from becoming a helpless victim of unplanned action.

(4) A Tool of Communication to Outside World. Funds Flow Statement helps in gathering the financial states of Business. It gives an insight into the evolution of the present financial position and gives answer to the problem 'where have our resources been moving'? In the present world of credit financing, it provides a useful information to bankers, creditors, financial, it provides a useful informations and government etc. regarding amount of loan required, its proposes, the terms of repayment an sources for repayment of loan etc. the financial manager gains a confidence born out of a study of Funds Flow Statement. In fact, it carries information regarding firm's financial policies to the outside world.

(5) Future Guide. An analysis of Funds Flow Statements of several years reveals certain valuable information for the financial manager for planning the future financial

requirements of the firm and their nature too i.e. Short term, long-term or mid term. The management can formulate its financial policies based on information gathered from the analysis of such statements. Financial manager can rearrange the firm's financing more effectively on the basis of such information along with the expected changes in trade p payables and the various accruals. In this way, it guides the management in arranging its financing more effectively.

Difference between Funds Flow Statement and Cash Flow Statement Basis Difference 1. of Funds Flow Statement Cash Flow Statement

Basis of Analysis Funds flow statement is Cash flow statement is based based on broader concept on narrow concept i.e. cash, which is only one of the i.e. working capital. elements of working capital. Source Funds flow statement tells about the various sources from where the funds generated with various uses to which they are put. Funds flow statement is more useful in assessing the long-range financial strategy. In funds flow statement changes in current assets and current liabilities are shown through the schedule of changes in working capital. Cash flow statement stars with the opening balance of cash and reaches to the closing balance of cash by proceeding through sources and uses. Cash flow statement is useful in understanding the short-term phenomena affecting the liquidity of the business. In cash flow statement changes in current assets and current liabilities are shown in the cash flow statement itself.

2.

3.

Usage

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Schedule of Changes in Working Capital

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End Result

Funds flow statement Cash flow statement shows the shows the causes of causes the changes in cash. changes in net working capital. Funds flow statement is in In cash flow statement data alignment with the accrual obtained on accrual basis are basis of accounting. converted into cash basis.

6.

Principal of Accounting