Funds Flow Summary

The income statement and the balance sheet are important statements because they are used as means of conveying information about the earnings and the financial position of the enterprise. By contrast cash flow and funds flow statements are addressed to highlighting the financial management aspect. The cash flow statement analyses cash inflows and outflows with a view to explaining the difference between cash balances at the beginning and close of the accounting period. The funds flow statement is addressed to detailing the sources and uses of funds during the accounting period and working capital.

Cash flow and funds flow statements may be used to provide supplementary information to that contained in the income statement and balance sheet. Funds flow statements are being increasingly adopted by companies for financial reporting purposes. As we shall see in Part 4, one aspect of the controversy in financial reporting concerns cash flow accounting

as an alternative to income accounting. The argument for cash flow statements in that context is that since a firm's success depends on its ability to maximize its cash flows through time, cash flow statements would be more meaningful than conventional income statements and balance sheets.

Cash flow and funds flow statements are important for financial planning purposes. In this context, they are associated with budget forecasts. The particular importance of the cash flow budget is to highlight the financial consequence of budget plans and project the cash surpluses and deficits which will occur periodically through the planning period. This function of cash flow statements will be examined elsewhere on this website.


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Read on: The Cash Flow Statement

The cash flow statement

The cash flow statement summarizes the flow of cash in and out of the firm over a period of time. In this sense, it is really an analysis of the cash account. The cash flow statement is important for a number of reasons. First, by focusing on cash flows, it explains the nature of the financial events which have affected the cash inventory. Thus, if a firm had a balance of Lx at the beginning of the accounting period and Ly at the end of the accounting period, the cash flow statement will explain the reason for the difference. Second, the cash flow statement is important... see: The Cash Flow Statement