Fund flow statement refers to the transfer of economic value from one asset to another, from one equity to another. The term ‘flow’ indicates change, and hence, a fund flow refers to a change in funds or a change in working capital.
Importance of Fund Flow Statement
1. It shows the various sources and uses or applications of funds between the two accounting periods.
2. Fund flow statements assist in determining the shift in amount of current assets investment and current liabilities financing.
3. It works as a crucial instrument for allocation of resources of a firm. It allows an organization for making plans for optimal allocation of resources.
4. It highlights the financial power and weak spots of a firm.
5. It help the investors to determine about how the company has employed the funds given by them & its financial strength. Based on comparative study of the past with the present, investors can identify & discover potential drains on funds in the future.
6. It assists the management to take remedial measures in case of deviations between two balance sheet figures.
7. It helps the investors for effective decisions at the time of their investment proposals.
8. It also offers detailed information concerning profitability, operational efficiency and financial matters of a firm.
9. It explains the connection between changes in working capital & net profits. Funds flow statements reveals the quantum of funds produced by operations.
10. It demonstrates the firms’ capacity to generate long-term financing to meet the investment in long-term assets.
11. It functions as a guide to the management to prepare its dividend, retention and investment policy, etc.
12. It helps to assess the financial implications of business transactions associated with operational finance and investment.
13. It helps the management to predict the requirements of extra capital.
14. The information provided by a this statement is much more trustworthy, reliable & consistent because it is prepared to include funds generated from operations and not net profit after depreciation.
15. It assists in finding out the firms’ capacity to pay interest and dividend, and pay debt when it becomes due.
Funds Flow Statement is based on the Accrual System of Accounting. However, in case of Cash Flow Statement – only the transactions effecting Cash or Cash equivalents are taken into consideration.