The Funds flow analysis explains the various sources from which funds are raised and uses to which funds are put. It shows the change in assets and liabilities from the end of one period of time to the end of another period of time (i.e. between two Balance sheet dates). An analysis of statement helps us in answering question such as what is the amount of funds generated from Operations. How were the Fixed Assets of Organisation Financed? Whether the liquidity position of the organization increased? Etc.
Concept of Funds
The term fund has been defined and interpreted differently by different experts. Broadly the term fund refers to all the financial resources of the company. On the other extreme, fund has been understood as Cash only. However, the most acceptable meaning if funds is working capital. Working capital is the excess of current assets over current liabilities.
Concept of Flow
The flow of funds refers to transfer of economic values from one asset or equity to another. When funds mean working capital, flow of funds refers to changes in assets and liabilities, which cause a change in working capital of the organisaton. To identify a flow of funds, we have to understood the difference between current and Non – current Accounts.
Current Accounts and Non – Current Accounts.
Any account which is either current asset or a current liability is a current account. An account which is neither current asset nor current liability is Non – Current Account.
The concept of current accounts is important as fund implies working capital, which is the difference between current assets and current liabilities. If there is a change in a current account, there is a Possibility of Flow of funds If there is no change in any of the current accounts, there is cannot be any flow of funds.
General Rule
- Transactions that involve only current Accounts do not result in a flow. In other words, if both the accounts getting impacted on account of a transaction are Current accounts there is no change in position of funds.
- Similarly, transactions that involve only Non – Current Accounts also do not result in a flow.
- Transactions that involve one current account and one non – current account results in a flow of funds.
