Funds stream declaration reveals the changes in the financial position between two balance sheet dates. It represents the motion of funds and the motion can be inward called as income or invoices. In case of outward movement, it is represented by expenditure or payments.
The term, “funds” has various meanings. In the context of funds circulation statement “funds” means the net working capital. Flow of funds means modifications in funds position of changes in working capital.
Operating capital refers to that part of capital which is required for meeting the needs of existing operations.
There are two ideas of working capital, namely gross working capital and net working capital.
Gross working capital describes total investment in present assets. Net working capital means of excess of current properties over existing liabilities. Deals including a repaired asset/liability on the one hand and an existing asset/liability on the other hand outcome in modifications in working capital. Deals within the exact same category will not lead to modification in working capital.
A funds flow statement is a declaration which explains the different sources from which funds were raised and the usages to which these funds were put. There are three steps associated with the preparation of funds circulation statement. They are i) preparation of schedule of modifications in working capital 2) estimation of funds from operation and 3) preparation of funds circulation statement. While preparing schedule of modifications in working capital, we need to take just present items viz., current properties and current liabilities; and while determining funds from operations we have to at first arrive at the net profit/loss.
Later on we need to adjust the items which do not include outflow of funds and the products which are currently debited to profit and loss account. Non fund or non operating items which have actually already been credited to benefit and loss account must also to be adjusted. Funds stream statement reveals the sources from which extra funds are gotten and the usages to which these sources are made use of. Funds from operations, problem of share capital, debentures, long term loans from banks and banks, sale earnings of fixed assets are important sources of funds.
Repayment of long term loans and debentures, repayment of preference share capital, payment of dividends, and acquisition of fixed assets are the important application of funds. Funds flow statement help the management accountant, financial analyst and creditors in many ways. By using the funds flow statement they are able to ascertain the ways in which the funds are utilized as well as the ways by which the funds are obtained. This in fact provides them insight towards improving the profitability position of the firm to a great extent.
References:
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