Fundamentals of Management Accounting · Ch 4 — Working Capital Management and Cash Flow Statements
Cash Flow Statement vs Funds Flow Statement
Cash Flow Statement vs Funds Flow Statement
Students often confuse the cash flow statement with the older funds flow statement. Both are statements of financial flows prepared from two consecutive balance sheets, but they differ in what they measure and how they are presented. The distinction is a frequently asked examination question.
The fundamental difference lies in the meaning of the word 'funds'. A cash flow statement is concerned only with cash and cash equivalents — the actual movement of cash. A funds flow statement is concerned with the wider concept of working capital — the change in net working capital (current assets minus current liabilities) between two dates, and the long-term sources and applications of funds that caused it.
| Basis of distinction | Cash Flow Statement | Funds Flow Statement |
|---|---|---|
| Concept of 'funds' | Cash and cash equivalents | Working capital (net) |
| What it shows | Inflows and outflows of cash during the period | Sources and applications of funds that changed working capital |
| Basis of preparation | Cash basis | Accrual / working-capital basis |
| Classification | Operating, investing and financing activities | Sources of funds and applications of funds |
| Supporting schedule | No separate schedule needed | A 'Schedule of Changes in Working Capital' is prepared |
| Governing standard | Prepared as per AS-3 | Not governed by any accounting standard |
| Main use | Judging liquidity and short-term cash position | Judging the long-term financial and structural changes in the firm |
| Effect of a current-asset ↔ current-liability change | May or may not affect cash | Does not affect working capital if within current items |
A statement showing the sources and applications of funds that caused the change in a firm's net working capital between two balance sheet dates; based on the working-capi …