Definitions and explanations
Cash flow statement:
A cash flow statement (or statement of cash flows) is a financial statement that reports the enterprise’s cash/cash equivalents generated (inflow) and expended (outflow) over a specified period.
It indicates the ability of the enterprise to generate cash and its equivalents to fund its operations and meet its obligations- demonstrating where the enterprise’s money is coming from and how it is being spent. It is an indicator of the liquidity position of an enterprise.
Cash includes actual currency as well as bank account balances. Cash equivalents are highly liquid current assets of an enterprise which are easily and readily convertible into a known amount of cash. These include money market holdings, commercial paper and other such investments which have a maturity of less than 3 months.
Cash flow statement is bifurcated into 3 categories:
Cash flows from operating activities- inflows and outflows from principal business activities i.e., from sale and purchase of its products/services e.g., sale of goods, revenue from services, rent payments etc.
Cash flows from financing activities- inflows and outflows that cause changes in owner’s capital and borrowings of the enterprise e.g., raising of capital, taking and repayment of loans.
This bifurcation gives an in depth understanding of the sources from where cash has been generated by an enterprise and how it has been spent.
The net result of the cash flow position shows the net increase/decrease in cash and cash equivalents over the specific period.
Fund flow statement:
A fund flow statement is a statement that reports the changes in financial position of an enterprise between two consecutive financial statement dates. It indicates the inflow i.e., sources of funds and outflows i.e., application of funds.
The term fund broadly indicates all financial resources of an enterprise. In the context of fund flow statement, the term fund refers to working capital i.e., difference between all current assets and current liabilities.
A transaction which increases working capital is a source of fund and that which decreases the working capital is an application of fund. The net result of the fund flow position shows the net increase/decrease in working capital over the specific period.
It basically identifies the different sources from where funds have been collected and where they have been applied.
Preparation of the fund flow statement involves 3 stages:
- Preparation of statement of changes in working capital
- Preparing statement of funds generated from operations
- Preparation of sources and uses of funds
Fund flow is useful for understanding the reasons for change in working capital of the enterprise. The understanding of sources and application of funds is useful in identifying the need for funds in the future and is used as a capital budgeting tool.
Difference between cash flow and fund flow statement:
The main points of difference between cash flow and fund flow statement have been detailed below:
- Cash flow is the report of net inflows and outflows of cash and its equivalents.
- Fund flow is the report of movement of funds of the enterprise, namely the changes in its working capital.
- Cash flow is a narrower concept as it only deals with cash and cash equivalents such as money market holdings and short term highly liquid assets.
- Fund flow is a broader concept as it deals with all elements of working capital ie: all current assets and current liabilities.
- Cash flow is used for short term analysis of enterprise’s liquidity position. It shows the reason for changes in cash balances between two financial statement dates. It is used as an analysis tool for cash budgeting of the enterprise.
- Fund flow is used for a longer term analysis of the enterprise’s financial position. It is used to show how the funds have been generated and how they have been used. It is used as an analysis tool for capital budgeting of the enterprise.
4. Method of preparation
- The cash flow statement follows cash basis of accounting as it only shows changes in cash and cash equivalents over the period.
- Fund flow statement on the other hands follows accrual basis of accounting as it considers changes between all current assets and current liabilities.
5. Net result
- The net result of the cash flow position shows the net increase/decrease in cash and cash equivalents over the specific period.
- The net result of the fund flow position shows the net increase/decrease working capital over the specific period.
- Cash flow statement involves bifurcating cash inflows and outflows into 3 categories – operating, investing and financing activities; to show net change in cash and cash equivalents.
- Fund flow statement involves bifurcation into sources of fund and applications of funds; to show net change in working capital.
Cash flow statement vs fund flow statement – tabular comparison
A tabular comparison of cash flow and fund flow is given below:
|Reports inflow and outflow of cash and cash equivalents||Reports sources and application of funds|
|Concept and components|
|Narrower concept – considers only cash and cash equivalents||Broader concept – considers all current assets and current liabilities|
|Net increase/decrease in cash and cash equivalents||Net increase/decrease in working capital|
|Used for short term analysis.||Used for long term analysis|
|To understand liquidity position – cash budgeting||To understand financial position – capital budgeting|
|Cash basis||Accrual basis|
|3 categories – operating, investing and financing activities||2 categories – sources of funds and application of funds|
Conclusion – cash flow statement vs fund flow statement:
Both cash flow and fund flow are tools of financial analysis for an enterprise and can accompany the financial statements of the enterprise.
Cash flow provides an insight into the liquidity of the enterprise whereas fund flow provides an insight into the financial and operating performance of the company. These tools are used for decision making by management, investors and creditors of an enterprise.