Differences between Cash Flow Statement and Fund Flow Statement

27/07/2020 1 By indiafreenotes

A cash flow statement shows the inflows and outflows of cash and cash equivalents. Cash includes cash in hand and demand deposits with the banks while cash equivalents are highly liquid investments i.e., they can be readily converted into cash like marketable securities, commercial papers, and short-term government bonds. It explains the changes in the cash in hand and cash at bank at the beginning and the end of the accounting period.

Accounting standard 3 deals with the cash flow statement. It has been classified into three broad categories:

  • Operating Activities: Representing movements of money due to regular business operations like the purchase, sale, production, etc. of goods.
  • Investing Activities: Representing the movement of cash due to the purchase or sale of assets or any other investment activities of the business.
  • Financing Activities: Accounts for the funds raised through the issue of shares or debentures, long term loans, etc. and utilised for the redemption of shares or debentures and payment of dividend, etc.

There are two methods of preparation of a Cash Flow Statement, they are:

  • Direct Method
  • Indirect Method

Fund Flow Statement

Funds refer to the working capital of the company, so fund flow statement is a statement that studies the changes in the working capital of the business between two accounting years. It shows the additions in the working capital through various sources like issuing shares, debentures or raising loans, etc. and reduction in it through different applications like the redemption of shares or debentures, repayment of loans, purchase of fixed assets, etc.

Fund Flow Statement explain the reasons for the change in the working capital of the business between two Balance Sheet dates through various Non-Current Assets and Non-Current Liabilities, which are responsible for the increase or decrease in the working capital. A fund flow statement displays the financial status of an organisation, which ensures easy comparison and analysis between two accounting periods. It clarifies the variability in the assets, liabilities and equity of the company.

It is prepared based on cash and cash equivalents. It is prepared based on fund as working capital.
Cash from operation is calculated. Funds from operation is calculated.
Statement of changes in working capital is not prepared. Statement of changes in working capital is prepared.
It is started with cash flows from operating activities. It is started with funds from operation or funds lost in operation.
It is ended with closing cash in hand and cash equivalents. It is ended with either increase in working capital or decrease in working capital.
The reasons for the change in cash are known through cash flow statement. The reasons for the change in working capital are known through fund flow statement.
Short term financial pIanning is done through cash flow statement. Medium term and long term financial planning is done through funds flow statement.
Cash flow analysis is based on cash concept. Funds flow analysis is based on accrual concept.
It is used for preparing cash budgeting. It is used for preparing capital budgeting.
It shows only changes in cash position. It is concerned with the changes in working capital between two balance sheet dates.
It is worked as an indicator of improved working capital. It is not necessary that an improved fund position will be an indicator of improved and sound cash position.
Increase in current liability or decrease in current assets brings decrease in working capital and vice versa. Increase in current liability or decrease in current asset brings increase in cash and vice versa.