Liquidity refers to resources currently available with the firm.

It is reflected by the funds or cash flows rather than just the stock of current assets and liabilities.

Funds flow is a change in a firms net current assets. Funds or cash flows occur due to changes in items in the balance sheet and profit & loss statement. Thus liquidity analysis involves measurement of changes in assets, liabilities and equity.

Current Assets means all the assets that can be converted into cash within one working year Eg of CA are
Cash Bills Receivables Debtors Inventory Prepaid Expenses

Current liabilities means which the firm has to pay within one working year
Creditors Bills Payable Proposed Dividend Outstanding Expenses

Total Resource Basis

Working capital Basis

On the basis of Cash

Sources of Funds
Increase in Capital or Liabilities

Uses of funds
Decrease or payment of Liabilities & capital

Sale or decrease in Assets

Increase or purchase of assets

TABLE 1. ABC Co.: Balance Sheet Changes, March 31,19Xl-March 31, 19X2 Changes in the financial position of the firm 19X1 ASSETS Cash Debtors Stock (inventory) Total current assets Fixed assets (net) Other assets Total Assets LIABILITIES & NET WORTH Bank borrowing Creditors Provision for taxes Accrued expenses Total current liabilities Long-tenn debt Total liabilities Paid-up share capital Reserves and surplus Total Liabilities 54 6,750 10,125 16,929 2,970 945 20,844 3,510 2,835 270 810 7,425 1,944 9,369 8.37 3,105 20,844 19X2 135 8,235 22,680 31,050 6,075 1,890 39,015 8,664 6,615 972 2,700 18.951 1,404 20,355 8,370 10,290 39,015 (Rs 000) Change 81 1,485 12,555 14,121 3,105 945 18,171 5,154 3,780 702 1,890 11,526 -540 10,986 7,185 18,171

Change in short term element

Change in short term element Change in long term element

Change in long term element

No Flow of fund

Flow of fund

Flow of fund

No flow of fund

It has three major parts

Statement of changes in Working Capital Fund From Operations Fund Flow Statement: Statement showing sources & uses of funds

Funds flow from operations

+ PAT ( loss) + Depreciation/ amortization + Non-Operating expenses (e. g. Loss from the sale of fixed assets, interest paid..) Non-operating incomes (e.g. Gain from the sale of fixed assets)

Sources of funds or cash flows:

funds from operations sale of fixed assets issue of share capital borrowings
losses purchase of fixed assets repayment of borrowings payment of dividends

Uses of funds are:

10

Analysis of Financial Position Evaluation of Firms Financing An instrument for Allocation of Resources A tool of Communication to outside World Future Guide

Meaning of Fund Meaning of Fund Flow statement Format

Sources & Uses of Funds Changes in Working Capital Funds from operation

Importance of Fund Flow Statement