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ICWAI Funds Flow Analysis Financial Management & International Finance study material download free

ICWAI Funds Flow Analysis Financial Management & International Finance study material download free

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ICWAI Funds Flow Analysis Financial Management & International Finance study material download free
ICWAI Funds Flow Analysis Financial Management & International Finance study material download free

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345
Fianancial Management & international finance
Study Note - 3
FINANCIAL ANALYSIS AND PLANNING
3.1. Funds Flow Analysis
This Section includes :
l
Meaning and concept of Funds
l
Meaning and Definition of Fund Flow Statement
l
Funds Flow Statement - Position in India
l
Significance, Importance and Uses of Funds Flow Statement
l
Cash Flow StatementINTRODUCTION :
Every business concern prepares two basic financial statements at the end of accounting period,namely the Balance Sheet or position Statement and Profit and Loss Account or IncomeStatement. Balance Sheet reveals the financial position of the business concern at a certainpoint of time. It reveals the financial status of the business concern. The assets side of a BalanceSheet shows the deployment of resources of an undertaking while the liabilities side indicatesits obligations i.e., the manner in which these resources obtained. The Profit and Loss Accountor Income Statement reveals the net results of operations over a period of time i.e., how muchprofit was earned (or loss sustained) by the business enterprise during the accounting period.The Balance Sheet provides only a static view of the business. It is a statement of assets andliabilities on a particular date. It does not show the movement of funds. In business concerns,funds flow from different sources and similarly funds are invested in various sources of investment. It is a continuous process. The study and control of this funds flow process is themain objective of financial management to assess the soundness and solvency of a business telllittle about its flow of funds, i.e., financing and investing activities over the related period. Likethe Balance Sheet, even the Profit and Loss Account does not depict the changes that havetaken place in financial condition of a business concern between two dates. Hence there is aneed to prepare an additional statement to know the changes in assets, liabilities and owners’equity between dates of two Balance Sheets. Such a statement is called Funds Flow Statementor Statement of Sources and uses of funds or where come and where gone statement.The funds flow statement, which is also known as the Statement of Changes in financial position,is yet another tool of analysis of financial statements.
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Fianancial Management & international finance
346
COST-VOLUME-PROFIT ANALYSIS
 
Financial Analysis and Planning
MEANING AND CONCEPTS OF FUNDS :
Funds Flow Statement is a widely used tool in the hands of financial executives for analysingthe financial performance of a business concern. Funds keep on moving in a business whichitself is based on a going concern concept.The term Funds has a variety of meanings.
(a) In a narrow sense
In a narrow sense
 fund
means only cash. Funds Flow Statement preparedon this basis is called as
Cash Flow Statement
. In this type of statement only in flow and outflowof cash is taken into account.
(b) In a broader sense
In a broader sense the term
 fund
refers to money value in whateverform it may exist. Here
 funds
mean all financial resources in the form of men, materials, money,machinery etc.
(c) Popular sense
In a popular sense the term funds means Working Capital I.e.
,
the excess of current assets over current liabilities. When the funds move inwards or outwards they cause aflow or rotation of funds. Here the word fund means net working capital. In short, if fundsmean working capital, then the statement prepared on the basis is called Funds Flow Statement.The concepts of funds as working capital is the most popular one and in this chapter we shallrefer to fund working capital and a funds flow statement as a statement of sources andapplication of funds.
MEANING AND DEFINITION OF FUNDS FLOW STATEMENT :
Funds Flow Statement is prepared to study the changes in the financial position of a businessover a period of time generally one year. Funds Flow Statement reveals both inflow and outflowof funds. The inflow of funds is known as
sources of the funds
and the outflow of funds means
uses or application of the funds.
Funds flow statement is also known as
Statement of sourcesand Applications of funds
or where got-where gone statement. Funds Flow Statement highlightsand changes in the financial structure of an undertaking. It determines the financialconsequences of business operations.Funds Flow Statement gives detailed analysis of changes in distribution of resources betweentwo Balance Sheet dates. This statement is widely used by the financial analysists and creditgranting institutions and financial and financial managers in performing their jobs. Thus, Funds,Flow Statement, in general is able to present that information which either is not available ornot readily apparent from an analysis of other financial statements.
Definitions
A statement of sources and application of funds is a technical device designed to analyse thechanges in the financial condition of a business enterprise between two dates.
 
- Foulke
Funds Flow Statement describes the sources from which additional funds were derived andthe use to which these sources were put.
- Anthony
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347
Fianancial Management & international finance
A statement of changes in financial position or statement of sources and application of fundsin which element of net income and working capital contribution to an understanding of thewhole of financial operations during the reporting period replace totals of these items.
-Kotler
A statement either prospective or retrospective, setting out the sources and applications of thefunds of an enterprise. The purpose of the statement is to indicate clearly the requirements of funds and how they are proposed to be raised and the efficient utilisation and application of the same.
FUNDS FLOW STATEMENT - POSITION IN INDIA :
The Funds Flow Statement is now regarded as an important part of financial reporting. Thenecessity of this statement is now undoubtedly realised by all owners, managements, investorsand others. In India, though the funds flow statement or statement of changes in financialposition has not so far become a part of the financial reporting, banks and financial institutionsare insisting when a company approaches them for loans.In India, under the existing legal requirements, companies are under no legal obligation topublish a statement of changes in financial position along with their financial statement.However there is a growing practice to publish such statement along with financial statementespecially in the case of companies listed on the stock exchanges and other large commercial,industrial and business concerns in the public and private sectors.
SIGNIFICANCE, IMPORTANCE AND USES OF FUNDS FLOW STATEMENT :
Funds flow statement is prepared to know the changes in assets, liabilities and owners equity between dates of two Balance Sheets. It is a statement of sources and uses of funds. Funds FlowStatement is also known as Statement of Sources and Application of funds or movement of Funds Statement etc.Funds flow statement reveals both inflow and outflow of funds. The inflow of funds is knownas Sources of the funds and the outflow of funds means uses or Application of the funds.In other words Financial Statement gives detailed analysis of changes in the distribution of resources between two dates.It is very useful tool in the financial managers analytical kit. It provides a summary of management decisions on financing activities of the firm and investment policy. The followingare the advantages of Funds Flow Statement.
1.Analysis of financial operations
The Funds Flow Statement reveals the net affect of various transactions on the operational and financial position of the business concern. Itdetermines the financial consequences of business operations. This statement disclosesthe causes for changes in the assets and liabilities between two different points of time. Ithighlights the effect of these changes on the liquidity position of the company.
2.Financial policies
Funds Flow Statement guides the management in formulating thefinancial policies such as dividend, reserve etc.
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