Difference between Fund Flow Statement & Cash Flow Statement

Difference between Fund Flow Statement & Cash Flow Statement

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Difference between Fund Flow Statement & Cash Flow Statement

 

Difference between Fund Flow Statement & Cash Flow Statement

Difference between Fund Flow Statement & Cash Flow Statement
Difference between Fund Flow Statement & Cash Flow Statement

CASH AND FUND FLOW

  • The statement of change in financial position is known as “ Fund Flow Statement “. Because Fund Flow shows the amount in change in various balance sheet items between two accounting dates or years.
  • The fund flow statement describes the sources from which additional funds were derived and the use to which these sources were put.
  • A cash flow statement is a statement which provides a detailed explanation for the change in a firm’s cash during a particular period by indicating the firm’s sources and uses of cash during that period.

Difference between Fund Flow Statement & Cash Flow Statement

  1. Fund flow statement gives a broad perspective by indicating changes in working capital whereas cash flow statement covers the narrow perspective.
  2. Fund flow statement helps for long range planning but cash flow statement tends to be more useful in short run analysis.
  3. Fund flow statement attempts to identify the inflows and outflows of funds in its preparation while cash flow statement is prepared by recognizing the inflows and out flows of cash.
  4. Under fund flow analysis, the changes in working capital are shown in a separate statement but under cash flow analysis changes in both current and non current accounts appear in the cash flow statement.

Purpose or use of the Fund Flow Statement

  1. To know the liquidity position of the firm.
  2. To know the causes of changes in the firm’s working capital or cash position.
  3. What fixed assets are acquired by the firm?
  4. Did the firm pay dividends to its shareholders or not? If not, was it due to shortage of fund?
  5. How much of the firm working capital needs was met by the fund generated from current operations?
  6. Did the firm use external sources of financing to meet its needs of fund?
  7. If the external financing was used, what ratio of debt – equity was maintained?
  8. Did the firm sell any of its non- current assets? If so, what were the proceeds from such sales?
  9. Could the firm pay its long term debt as per the schedules?
  10. What were the significant investment and financing activities of the firm which did n involve working capital.

RULES FOR PREPARATION
Fund Flow Statement:
Increase (Decrease) in Working Capital (WC):

  1. Increase in WC = Increase in Current Assets or (Decrease) in Current Liabilities.
  2. Decrease in WC = (Decrease) in Current Assets or Increase in Current Liabilities.

Sources and uses of Fund:

  1. Sources of Fund = Decrease in Assets of Increase in LT Liabilities/Equity.
  2. (Uses) of Fund = Increase in Assets or Decrease in LT Liabilities/Equity.

Cash Flow Statement:
A. Operating Activities:
Current Assets:

  1. Increase in Current Assets (other than cash & bank balance), decrease in Cash.
  2. Decrease in Current Assets (other than cash & bank balance), increase in Cash.

Current Liabilities:

  1. Increase in Current Liabilities, Increase in Cash.
  2. Decrease in Current Liabilities, Decrease in Cash.

B. Investment Activities:

  1. Increase in Non-Current Assets, Decrease in Cash.
  2. Decrease in Non-Current Assets, Increase in Cash.

C. Financing Activities:

  1. Increase in Non-Current Liabilities/Equity, Increase in Cash.
  2. Decrease in Non-Current Liabilities/Equity, Decrease in Cash.

RATIO ANALYSIS

  • Ratio analysis is a powerful tool for analyzing financial of a business organization.
  • A ratio simply states the relationship between two financial statement amounts.
  • A ratio is defined “the additional quotient of two mathematical expressions and as the relationship between two or more things.”
  • In financial analysis, a ratio is used as an yardstick for evaluation the financial position and performance of a firm.

Ratios are mainly divided into 4 categories:

  1. Liquidity Ratios – Measure company’s capacity to meet short-term obligations.
  2. Leverage Ratios -Show the company’s capacity to meet its short term and long term debt obligations.
  3. Activities Ratios – Indicate how efficiently the company uses its assets in generating sales.
  4. Profitability Ratio – Indicate the net return on sales and assets.

Now will see the name of the Ratio, Formula, Industry Average and Signification:

RATIOSFORMULAINDUSTRY AVERAGESIGNIFICANTE/INTERPRETATION
LIQUIDITY RATIOS
Current RatioCurrent Assets
Current Liabilities		2:1Test short term debt paying ability. If the CR is low, the form may have difficulty in meeting short-term commitments. A high ratio indicates excessive investment in current asset or under utilization of short term-Investment.
Quick RatioCash+Mkt.Sceurity +Receivable
Current Liability		1:1Measures the farm’s ability to meet short-term obligation form its most liquid assets. In this case inventory is excluded from CA as it is far less liquid than other CA.

 

RATIOSFORMULAINDUSTRY AVERAGESIGNIFICANTE/INTERPRETATION
LIVERAGE RATIOS
Debt to Total Assets 
Total Debt
Total Assets		 
33%		Measure the utilization of debt through total assets.
A low ratio as preferable to creditors as it implies greater protection of their position.
A high ratio means that the form must pay a higher interest/profit rate on its borrowing.
Debt to Equity 
Total Debt
Equity		 
1:1		A higher ratio implies that a high proportion of asset financing is using a great deal of financial leverage.
Times Interest Earned 
 
EBIT
Interest/Profit		 
 
 
7 Times		Measures the firm’s ability to meet annual interest/profit expenses on its debt out of its earning. A higher ratio is preferable. A ratio more than 1 is mandatory, otherwise a company does not even generate enough earnings to cover interest/profit on debt.
Debt Service Coverage RatioAfter Tax Profit +Dep.+Int/Profit
Int/Profit+12 Month Installment		 
5.5 Times		Measures ability of the company to meet its Fixed Installment out of its income.

 

RATIOSFORMULAINDUSTRY AVERAGESIGNIFICANTE/INTERPRETATION
ACTIVITY RATIOS
Receivable TurnoverSales
Av. Receivables		 
10 Times		Measure how many times a company’s accounts receivable have been turned into cash during the year.
Average collection period 
Receivables X 365
Sales		 
36 days		Measure the efficiency of a firm in how many days it collects an account receivable.
Inventory TurnoverCOGS
Av. Inventory for the year		 
7 Times		Measures how many times a company’s inventory has been used/sold during the year
Fixed Asset TurnoverSales
Fixed Assets		5.4 TimesMeasures the efficient use of Fixed Assets to generate Sales.
Total Assets TurnoverSales
Total Assets		1.5 TimesMeasures how efficiently total assets are used to generate Sales.

 

RATIOSFORMULAINDUSTRY AVERAGESIGNIFICANTE/INTERPRETATION
PROFITABILITY RATIOS
Return on SaleNet Income
Sales		6.7%This ratio indicates the profitability of sales after all expenses.
Return of Total AssetsNet Income +Profit on Debt
Total Assets		 
10%		This ratio indicates how efficiently total assets of a firm are used to generate income.
Return of EquityNet Income
Share Holder Equity		 
15%		Measures the success of a business in reaching its goal by generating maximum return on shareholder’s investment of the form’s. Return of equity is the single measure of the company’s success in fulfilling its goal.

Difference between Fund Flow Statement & Cash Flow Statement