Objectives of Funds Flow
Profit & Loss Account and Balance Sheet are not able to give answer to some basic questions. For this purpose Funds Flow Statement is prepared. According to Perry Mason who points out in AICPA Research Study No. 2 that without such a statement, the following questions will remain unanswered:
Meaning of the term 'Fund': - The term 'Fund' has been assigned different meanings by different people. In narrow sense 'Funds' means cash and Bank balance. To many people funds is nothing but having the net effect of various business events on the basis of cash. This explains the trend towards the preparation and presentation of "Cash Flow Statement" in published report of accounts.
But in wider sense the term 'Fund' is the sum of cash and assets, which are easily convertible into cash minus current liabilities. In other words 'Fund' means excess of current assets over current liabilities. Where current assets include cash in hand, cash at bank, bills receivable, sundry debtors, stock, marketable securities and prepaid expenses etc. The current liabilities include sundry creditors, bills payable, outstanding expenses, short-term loans and bank overdraft etc.
Funds = Current Assets - Current Liabilities = Working Capital
Meaning of the term 'Flow': - The term 'Flow' means change. Therefore flow of funds means change in working capital. The change in funds may be either positive or negative. It may be inflow of funds or outflow of funds.