Difference Advantage Disadvantage and Uses of

Cash Flow Statement & Funds Flow Statement

There are 3 basic financial statements that exist in the area of Financial Management.
1. Balance Sheet.
2. Income Statement.
3. Cash Flow Statement.
4. Fund Flow Statement
The first two statements measure one aspect of performance of the business over a period
of time. Cash flow statements signify the changes in the cash and cash equivalents of the
business due to the business operations in one time period. Funds flow statements report
changes in a business's working capital from its operations in a single time period, but have
largely been superseded by cash flow statements.
A Cash Flow Statement is a statement showing changes in cash position of the firm from
one period to another. It explains the inflows (receipts) and outflows (disbursements) of cash
over a period of time. The inflows of cash may occur from sale of goods, sale of assets,
receipts from debtors, interest, dividend, rent, issue of new shares and debentures, raising
of loans, short-term borrowing, etc. The cash outflows may occur on account of purchase of
goods, purchase of assets, payment of loans loss on operations, payment of tax and
dividend, etc.
A cash flow statement is different from a cash budget. A cash flow statement shows the cash
inflows and outflows which have already taken place during a past time period. On the other
hand a cash budget shows cash inflows and outflows which are expected to take place
during a future time period. In other words, a cash budget is a projected cash flow
statement.
Funds Flow Statement states the changes in the working capital of the business in relation
to the operations in one time period.
The main components of Working Capital are:
Current Assets
1. Cash
2. Receivables
3. Inventory
Current Liabilities
1. Payables
Net working capital is the total change in the business's working capital, calculated
as total change in current assets minus total change in current liabilities.

FOR EXAMPLE: If the inventory of the business increased from Rs 1,40,000 to Rs

1,60,000, then this increase of Rs 20,000 is the increase in the working capital for the
corresponding period and will be mentioned on the funds flow statement. But the same
would not be reflected in the cash flow statement as it does not involve cash.
So the Fund Flow Statement uses all the above four components and shows the change in
them. While a cash flow statement only shows the change in cash position of the business.

Cash flow statements have largely superseded funds flow statements as measurements of a
business's liquidity because cash and cash equivalents are more liquid than all other current
assets included in working capital's calculation.

What is Included in a Cash Flow Statement?

The statement of cash flows uses information from the other two statements (Income
Statement and Balance Sheet) to indicate cash inflows and outflows.

A Cash Flow Statement comprises information

on following 3 activities:
1. Operating Activities
2. Investing Activities
3. Financing Activities

1. Operating Activities: Operating activities include cash flows from all standard business
operations. Cash receipts from selling goods and services represent the inflows. The
revenues from interest and dividends are also included here. The operational
expenditures are considered as outflows for this section. Although interest expenses fall
under this section but the dividends are not included .Dividends are considered as a part
of financing activity in financial accounting terms.
2. Investing Activities: Investing activities include transactions with assets, marketable
securities and credit instruments. The sale of property, plant and equipment or
marketable securities is a cash inflow. Purchasing property, plant and equipment or
marketable securities are considered as cash outflows. Loans made to borrowers for
long-term use is another cash outflow. Collections from these loans, however, are cash
inflows.
3. Financing Activities: Financing activities on the statement of cash flows are much more
defined in nature. The receipts come from borrowing money or issuing stock. The
outflows occur when a company repays loans, purchases treasury stock or pays
dividends to stockholders. As the case with other activities on the statement of cash
flows depend on activities rather than actual general ledger accounts.

Table of Difference between Funds Flow Statement and Cash Flow Statement
Basis of
Difference

Funds Flow Statement

Cash Flow Statement

1. Basis
of Funds flow statement is based on Cash flow statement is based on narrow
Analysis
broader concept i.e. working capital. concept i.e. cash, which is only one of the
elements of working capital.
2. Source

Funds flow statement tells about the

various sources from where the
funds generated with various uses to
which they are put.

Cash flow statement stars with the

opening balance of cash and reaches to
the closing balance of cash by proceeding
through sources and uses.

3. Usage

Funds flow statement is more useful Cash flow statement is useful in

in assessing the long-range financial understanding the short-term phenomena
strategy.
affecting the liquidity of the business.

4. Schedule of In funds flow statement changes in In cash flow statement changes in current
Changes in current assets and current liabilities assets and current liabilities are shown in
Working
are shown through the schedule of the cash flow statement itself.
Capital
changes in working capital.

5. End Result

Funds flow statement shows the Cash flow statement shows the causes
causes of changes in net working the changes in cash.
capital.

6. Principal of Funds flow statement is in alignment In cash flow statement data obtained on
Accounting with the accrual basis of accounting. accrual basis are converted into cash
basis.

Advantages of Cash Flow Statement

1. It shows the actual cash position available with the company between the two balance
sheet dates which funds flow and profit and loss account are unable to show. So it is
important to make a cash flow report if one wants to know about the liquidity position of
the company.
2. It helps the company in accurately projecting the future liquidity position of the company
enabling it arrange for any shortfall in money by arranging finance in advance and if
there is excess than it can help the company in earning extra return by deploying excess
funds.
3. It acts like a filter and is used by many analyst and investors to judge whether company
has prepared the financial statements properly or not because if there is any discrepancy
in the cash position as shown by balance sheet and the cash flow statement, it means
that statements are incorrect.

Disadvantages of Cash Flow Statement

1. Since it shows only cash position, it is not possible to deduce actual profit and loss of the
company by just looking at this statement.
2. In isolation this is of no use and it requires other financial statements like balance sheet,
profit and loss etc, and therefore limiting its use.

Advantages of Fund Flow Statements

A Funds flow statement is prepared to show changes in the assets, liabilities and equity
between two balance sheet dates, it is also called statement of sources and uses of funds.
The advantages of such a financial statement are many fold.

Some of these are:

1. Funds flow statement reveals the net result of Business operations done by the company
during the year.
2. In addition to the balance sheet, it serves as an additional reference for many interested
parties like analysts, creditors, suppliers, government to look into financial position of the
company.
3. The Fund Flow Statement shows how the funds were raised from various sources and
also how those funds were deployed by a company, therefore it is a great tool for
management when it wants to know about where and from what sources funds were
raised and also how those funds got utilized into the business.
4. It reveals the causes for the changes in liabilities and assets between the two balance
sheet dates therefore providing a detailed analysis of the balance sheet of the company.
5. Funds flow statement helps the management in deciding its future course of plans and
also it acts as a control tool for the management.
6. Funds flow statement should not be looked alone rather it should be used along with
balance sheet in order judge the financial position of the company in a better way.

Disadvantages of Fund Flow Statements

Funds flow statement has many advantages; however it has some disadvantages or
limitations also.

Lets look at some of the limitations of funds flow statement.

1. Funds Flow statement has to be used along with balance sheet and profit and loss
account for inference of financial strengths and weakness of a company it cannot be
used alone.
2. Fund Flow Statement does not reveal the cash position of the company, and that is why
company has to prepare cash flow statement in addition to funds flow statement.
3. Funds flow statement only rearranges the data which is there in the books of account
and therefore it lacks originality. In simple words it presents the data in the financial
statements in systematic way and therefore many companies tend to avoid preparing
funds flow statements.
4. Funds flow statement is basically historic in nature, that is it indicates what happened in
the past and it does not communicate anything about the future, only estimates can be
made based on the past data and therefore it cannot be used the management for taking
decision related to future.
We can conclude that shorter the planning period more relevant is the Cash Flow Statement
and longer the planning period more relevant is the Fund Flow Statement