Cash Flow statement shows the changes in the cash position (Inflows and outflows) of a firm. It is an analytical reconciliation statement which explains the reasons for the differences between the opening and closing cash balances over a period. On the other hand, Fund Flow statement is a statement that shows the ups and downs of the financial position or the changes in working capital of the entity between the two financial years.
The financial position of any company can be better understood with the help of a cash flow statement and fund flow statement, along with the Balance Sheet and Income statement. These two statements helps stakeholders to know the sources and application of cash or funds. So, take a glance of the given article to understand the difference between cash flow and fund flow statement.
Content: Cash Flow Vs Fund Flow
|Basis for Comparison||Cash Flow||Fund Flow|
|Meaning||A cash flow statement is a statement showing the inflows and outflows of cash and cash equivalents over a period.||A fund flow statement is a statement showing the changes in the financial position of the entity in different accounting years.|
|Purpose of Preparation||To show the reasons for movements in the cash at the beginning and at the end of the accounting period.||To show the reasons for the changes in the financial position, with respect to previous year and current accounting year.|
|Basis||Cash Basis of Accounting.||Accrual Basis of Accounting.|
|Analysis||Short Term Analysis of cash planning.||Long Term Analysis of financial planning|
|Discloses||Inflows and Outflows of Cash||Sources and applications of funds|
|Opening and closing balance||Contains opening and closing balance of cash and cash equivalents.||Does not contains opening balance of cash and cash equivalents.|
|Part of Financial Statement||Yes||No|
Definition of Cash Flow Statement
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
Definition of 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 is helpful in understanding the variability in the assets, liabilities and equity of the company.
Key Differences Between Cash Flow and Fund Flow Statement
- A statement that shows the changes in the cash and bank balance between opening and closing dates is known as a cash flow statement while a statement that shows the variations in the financial position between the two financial years is known as a fund flow statement.
- Cash Flow Statement analyses the cash generating efficiency of the entity. Conversely, Fund Flow Statement examines the firm’s efficiency in utilising the working capital.
- Cash Flow statement is a part of Financial Statement. Unlike Fund Flow Statement which is not a part of the Financial Statement
- Cash Flow statement is useful for a short term financial analysis of cash planning while Fund Flow Statement is helpful to a long-term analysis of financial planning.
- Cash flow statement contains opening and closing balances of cash and cash equivalents. On the contrary, fund flow statement does not contains opening and closing balances of cash and cash equivalents.
- Cash Flow statement uses the Cash basis of accounting. On the contrary, Fund Flow statement uses the Accrual Basis of Accounting.
- Cash Flow statement shows the inflows and outflows of cash, but Fund Flow Statement shows the sources and application of funds.
There are so many differences between the Cash Flow and Fund Flow, each essential for the sustenance of the firm. They are useful in analyzing the position of cash and funds in the business. Both of them enabled the users of the financial statements to project various plans & policies, liquidity, and solvency of the company.