72 objectives after reading this lesson the student

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7.2 OBJECTIVES After reading this lesson the student should be able to: Understand the statement of changes in working capital. Understand the meaning of fund flow statement. Understand the preparation of fund flow statement. 7.3 CONTENT 7.3.1 Need for fund flow analysis 7.3.2 Meaning of fund 7.3.3 Meaning of fund flow statement 7.3.4 Importance of fund flow statement 7.3.5 Limitations of fund flow statement 7.3.6 Statement of changes in working capital 7.3.7 Statement of fund flow 7.3.1 NEED FOR FUND FLOW ANALYSIS The traditional package of financial statements has as such limited role to play in financial analysis. The balance sheet is a statement of assets and liabilities on a particular date and portrays the financial position as on that particular date. Similarly the income statement will show in more detail only the profit or loss arising out of the productive and commercial activities of the enterprise during that period. However, they fail to throw light on those major financial transactions, which are behind the balance sheet changes. In order to ascertain such major financial transactions, or movement of financial resources or funds, a separate statement is prepared by comparing the balance sheets of two periods. This statement is variously known as funds flow statement or statement of sources and uses of funds. By recording these changes in the financial structure that have resulted from the companies trading activities, and at the same time indicating the reasons for those changes, the funds statement serves the dual role of an accounting reports and an analytical tool. This is so because the funds statement can be used as part of budgetary process in forecasting the company’s financial requirement for the future.
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97 7.3.2 MEANING OF FUND Funds flow statement is a widely used tool in the hands of financial executives for analyzing the financial performance of a concern. Funds keep on moving in a business which itself is based on a going concern concept. In a narrow sense, it means cash only and a funds flow statement prepared on this basis is called as cash flow statement. Such a statement enumerates net effects of the various business transactions on cash and takes into account receipts and disbursements of cash. In a broader sense, the term fund refers to money values in whatever form it may exist. Here funds means all financial resources in the form of men, material, money, machinery etc. but in a popular sense the term funds mean working capital i.e. the excess of current assets over current liabilities. When the funds move inwards or outwards, they cause a flow or rotation of funds. The work fund here means net working capital Working capital is ordinarily understood as excess of current assets over current liabilities. Some persons call total current assets as gross working capital and current assets minus current liabilities as net working capital or net current assets. In other words, the term fund stands for net working capital or net current assets or free current assets.
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