Definition: Funds Flow Statement
A Funds Flow Statement, also known as a Statement of Changes in Financial Position, is a financial statement that details how a business has raised and used its funds over a specified period. It distinguishes between sources of funds and their applications, presenting a comprehensive financial narrative of a company’s operational, financing, and investing activities. In the UK, the funds flow statement has largely been replaced by the cash flow projection, which provides a more direct insight into cash movements.
Sources of Funds:
- Trading Profits: Profits generated from the business’s core operations.
- Issues of Shares: Capital raised through the issuance of equity shares.
- Loan Stock: Capital raised through long-term borrowings like debentures.
- Sales of Fixed Assets: Cash inflow from selling long-term assets.
- Borrowings: Funds acquired through short-term or long-term loans.
Applications of Funds:
- Trading Losses: Funds used to cover losses incurred from business operations.
- Purchases of Fixed Assets: Expenditures on acquiring long-term assets like machinery and buildings.
- Dividends Paid: Funds distributed to shareholders as dividends.
- Repayment of Borrowings: Funds used to pay back loans.
Examples:
-
Tech Innovators Ltd.:
- Sources: Trading profits of $500,000, issuance of shares worth $200,000, sale of a building for $100,000.
- Applications: Purchase of new machinery for $250,000, repayment of a bank loan of $150,000, dividends paid of $50,000.
-
Retail Hub PLC:
- Sources: $300,000 from trading profits, $100,000 from a long-term bank loan, $50,000 from the sale of old equipment.
- Applications: $200,000 for purchasing new store fixtures, $100,000 for trading losses, $20,000 for dividend payments.
Frequently Asked Questions:
What is the main purpose of a Funds Flow Statement?
The primary purpose of a Funds Flow Statement is to detail where financial resources are sourced and how they are used, helping stakeholders understand the financial strategy and health of a business.
How does it differ from a Cash Flow Statement?
While a Funds Flow Statement focuses on all types of funds flow including working capital and long-term investments, a Cash Flow Statement exclusively tracks cash inflows and outflows, providing a clearer picture of liquidity.
Why was the Funds Flow Statement replaced by the Cash Flow Statement in the UK?
The Cash Flow Statement offers more timely and relevant data on a company’s liquidity, making it easier for stakeholders to assess a company’s financial health and make informed decisions.
What are typical sources of funds?
Typical sources include trading profits, issuance of shares, loans, and sales of fixed assets.
What are typical applications of funds?
Common applications include trading losses, purchase of fixed assets, dividend payments, and repayment of loans.
Related Terms:
- Cash Flow Statement: A financial statement that shows the cash inflows and outflows over a specific period.
- Balance Sheet: A financial statement that provides a snapshot of a company’s financial position at a given point in time.
- Income Statement: A financial statement that details a company’s revenues and expenses over a specific period, resulting in net profit or loss.
Online References and Resources:
- Investopedia: Cash Flow Statement
- Corporate Finance Institute - Funds Flow Statement
- Accounting Tools - Funds Flow Statement
Suggested Books for Further Studies:
- Financial & Managerial Accounting for MBAs by Peter D. Easton, Robert F. Halsey, Mary Lea McAnally, Patricia R. Hicks
- Accounting Made Simple: Accounting Explained in 100 Pages or Less by Mike Piper
- Intermediate Accounting by Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield
- Financial Accounting Theory by William R. Scott
Accounting Basics: Funds Flow Statement Fundamentals Quiz
Dive deep into the fascinating realm of advanced financial accounting by exploring fundamental comparisons and tackling our intricate sample exam quiz questions. Excel in your financial proficiency!
