Readers looking to understand these financial statements would agree that distinguishing between cash flow and funds flow can be confusing.
By clearly outlining the differences between these two statements, this article will equip you to utilize both more effectively in financial reporting and analysis.
You'll learn the unique objectives, components, and formats of cash flow and funds flow statements, as well as see a practical example illustrating the key contrasts between the two.
Introduction to Cash Flow Statements vs Funds Flow Statements
A cash flow statement and a funds flow statement are two important financial statements that provide insight into a company's financial health. However, they have some key differences.
Defining Cash Flow Statements and Their Importance
A cash flow statement shows the actual cash inflows and outflows of a company over a specific period of time. It breaks down cash flows into three categories:
- Operating activities - Cash from day-to-day business operations
- Investing activities - Cash from investments and asset purchases/sales
- Financing activities - Cash from financing activities like loans, equity issuance etc.
Cash flow statements provide vital information about liquidity and solvency. They help assess if a business can generate enough cash to pay its obligations and fund operations.
Understanding Funds Flow Statements
A funds flow statement shows the sources and uses of working capital over an accounting period. It explains the changes between two balance sheet dates in terms of working capital.
The funds flow statement presents a detailed break down of:
- Where the funds came from - like profits, sale of assets, new loans etc.
- Where the funds were utilized - like purchase of fixed assets, repayment of loans, operational expenses etc.
It provides insights into how efficiently a company is managing its working capital.
Contrasting Cash Flow and Funds Flow Statements
The key differences between the two statements are:
- Focus - A cash flow statement focuses strictly on cash inflows and outflows. A funds flow statement looks more broadly at working capital.
- Coverage - A funds flow statement covers all changes in working capital. A cash flow statement does not cover changes in working capital components like accounts receivable, inventory etc.
- Completeness - A cash flow statement better represents the complete liquidity position of a company.
While both statements provide valuable information, the cash flow statement is considered more important and commonly used by financial analysts.
Is cash flow statement and fund flow statement same?
Cash flow statement and fund flow statement are two important financial statements that provide insights into a company's financial health, but they differ in some key ways.
The main differences are:
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Cash flow statement tracks the actual flow of cash and cash equivalents in and out of a business over a period of time. It shows how changes in balance sheet accounts and income affect cash and breaks down cash flow into operating, investing and financing activities.
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Fund flow statement analyzes changes in working capital over a period of time. Working capital is calculated as current assets minus current liabilities. So this statement reveals where funds were obtained from and where they were used.
In short, a cash flow statement depicts the movement of cash while a fund flow statement represents the sources and uses of working capital in business operations.
While both statements provide valuable information, a cash flow statement is more commonly prepared as it directly tracks cash - the most liquid asset vital for day-to-day functions. In contrast, the fund flow statement focuses on net working capital which, while important, does not give as clear a picture of liquidity.
So in summary, while related and often confused, the core difference lies in cash flow statement tracking actual cash flows while fund flow statement tracking changes in components of working capital.
What is the difference between fund flow statement and income flow statement?
The main difference between a fund flow statement and an income statement is that a fund flow statement shows the sources and uses of cash over a period of time, while an income statement shows the revenues, expenses, and profit or loss over a period of time.
Key Differences
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Purpose: A fund flow statement shows where cash has come from and where it has been used during a specific period. An income statement shows the profitability of a business over a period by subtracting expenses from revenues.
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Information Shown: A fund flow statement focuses on the inflows and outflows of cash. An income statement focuses on revenues, expenses, and net income or loss.
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Cash Basis vs Accrual Basis: A fund flow statement is prepared on a cash basis, meaning it tracks actual cash received and paid out. An income statement is prepared on an accrual basis, meaning it matches revenues earned and expenses incurred over a period regardless of when cash is received or paid.
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Format: A fund flow statement categorizes cash flows into operating, investing and financing activities. An income statement summarizes revenues, expenses, gains, losses and net income in a single financial statement.
In summary, a fund flow statement provides information about the liquidity and cash position of a business, while an income statement shows the profitability and operating performance of a business over an accounting period. Both statements provide valuable but different insights into the financial health of a business.
What is the difference between statement and cash flow statement?
A cash flow statement and a funds flow statement both provide valuable information about the financial health of a company, but they differ in a few key ways:
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Purpose: A cash flow statement shows the actual flow of cash in and out of a company over a period of time. This includes cash generated from operations, cash used for investing, and cash from financing activities. A funds flow statement shows where the funds came from and where they were used over a period, including working capital.
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Focus: A cash flow statement focuses strictly on cash activities. A funds flow statement provides a broader view, encompassing all changes in working capital.
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Contents: A cash flow statement has three sections - operating, investing, and financing. A funds flow statement contains application and source of funds sections.
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Accuracy: A cash flow statement depicts the actual cash position more accurately as it only records cash transactions. A funds flow statement relies on accrual accounting, which can involve estimates.
In summary, a cash flow statement provides a precise, cash-based view of money flowing in and out of a business. A funds flow statement offers a wider lens into changes in working capital from all financial activities using accrual accounting. While both offer insights, the cash flow statement paints a clearer picture of liquidity.
What is fund flow statements?
A Funds Flow Statement analyzes the changes in balance sheet accounts to determine where funds came from and where they were used over a certain period. It provides insights into how efficiently a company is managing its working capital.
The key differences between a Funds Flow Statement and a Cash Flow Statement are:
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A Funds Flow Statement analyzes changes in all balance sheet accounts, whereas a Cash Flow Statement only analyzes changes in the cash and cash equivalent accounts.
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A Funds Flow Statement shows the sources and uses of working capital during a period. A Cash Flow Statement shows the sources and uses of cash during a period.
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The Funds Flow Statement is based on the balance sheet, while the Cash Flow Statement is based on the income statement.
In summary, a Funds Flow Statement provides a broad overview of the inflows and outflows in a business over a period of time and highlights efficiently the working capital is being used. The Cash Flow Statement specifically tracks cash inflows and outflows. Both statements provide valuable but different insights into the financial health of a company.
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Cash Flow Statement Format and Components
The cash flow statement is a critical financial statement that summarizes how cash enters and leaves a business. By analyzing cash inflows and outflows, companies can assess liquidity and better manage cash.
There are three key components of a cash flow statement:
The Role of Operating Cash Flows
Operating cash flows relate to the core operations of a business - cash generated through day-to-day activities. Key operating cash flow items include:
- Cash inflows from sales of products or services
- Cash paid to suppliers for inventory and other expenses
- Cash paid as salaries to employees
Positive operating cash flow indicates efficient operations and adequate cash to fund ongoing business activities.
Investing Cash Flows Explained
Investing cash flows refer to money spent and received when acquiring or selling long-term, capital-intensive assets like:
- Property, plants, and equipment
- Long-term investments
- Intangible assets like patents
Investing cash outflows are important for future growth but may reduce short-term liquidity.
Financing Cash Flows: A Detailed Look
Financing cash flows illustrate the money borrowed and repaid related to debt, loans, or capital investments. Key financing cash flows include:
- Cash received from issuing bonds or taking loans
- Cash payments made to repay debt principal
- Cash payments made to shareholders as dividends
Analyzing financing cash flows helps assess appropriate leverage and repayment capacity.
In summary, the three sections of the cash flow statement provide vital insights into the stability, efficiency, and strategic direction of business operations. Assessing liquidity through cash flow analysis is essential for effective financial management.
How to Prepare Cash Flow Statement from Balance Sheet
Gathering Data from Financial Statements
To prepare a cash flow statement, you need information from the balance sheet, income statement, and statement of changes in equity. Key items to gather include:
- Net income from the income statement
- Changes in balance sheet accounts like accounts receivable, inventory, accounts payable etc.
- Information on sale and purchase of long term assets from the notes
- Details on issuance and repayment of debt and equity
Calculating Cash from Operating Activities
The operating cash flow section shows cash generated from core business operations.
Start with net income from the income statement. Then, make adjustments for non-cash items like depreciation, as well as changes in working capital accounts like inventory, accounts receivable and payable.
Increases in these accounts mean more cash is tied up in operations, so they are subtracted. Decreases free up cash, so they are added back.
Determining Cash from Investing Activities
Investing activities include cash paid or received from buying and selling long-term assets like:
- Property, plant and equipment
- Intangible assets
- Other long-term investments
The notes to financial statements provide details on these, which you can document in the investing cash flows section.
Identifying Cash from Financing Activities
Financing cash flows show issuance and repayment of debt, equity capital, and dividends. Key items to include are:
- Net proceeds from taking new loans or repaying existing debt principal
- Cash received from issuing new equity shares
- Dividend payments
Notes provide details on financing transactions to document.
Finalizing the Cash Flow Statement
The final cash flow statement presents operating, investing and financing cash flows in separate sections for the reporting period.
Subtotals for each section are added, with the net change in cash reconciling the cash balance on the balance sheet between the beginning and end of period.
Understanding the Funds Flow Statement Format
In contrast to the cash flow statement, the funds flow statement provides insights into the sources and uses of funds by a company over an accounting period.
Identifying Sources of Funds
The funds flow statement outlines where the funds originated from, including:
- Internal sources such as profits, sale of assets, depreciation, etc.
- External sources like issuance of shares, raising loans, etc.
By analyzing these sources, one can assess the ability of the company to generate funds from operations versus raising external finance.
Analyzing the Application of Funds
This section shows how the sourced funds were utilized by the company. Some examples include:
- Capital expenditures like purchase of fixed assets
- Repayment of outstanding loans
- Payment of taxes and dividends
Tracking the fund applications highlights the financial priorities and growth strategies of the company.
Assessing Changes in Working Capital
Working capital represents the company's short-term liquid assets. The funds flow statement captures any increase or decrease in working capital during the period.
For instance, it shows changes in inventory, account receivables, account payables, short-term loans, etc.
Monitoring working capital is vital to assess if the company has sufficient liquidity to meet its near-term obligations.
In summary, the funds flow statement provides a comprehensive view into the availability and usage of funds by a company over a period of time.
Difference Between Cash Flow Statement and Funds Flow Statement with Example
Now that both statements have been examined more closely, this section will highlight some of the key similarities and differences between them, using real-world examples where appropriate.
Comparing Usage in Financial Reporting
Cash flow statements tend to be more widely used and considered than funds flow statements. The cash flow statement is one of the three main financial statements, along with the income statement and balance sheet, required under generally accepted accounting principles (GAAP). Funds flow statements are less common.
The cash flow statement provides vital information about the actual cash inflows and outflows over a period. This helps assess liquidity and solvency. The funds flow statement offers a broader view of working capital changes, but cash remains king, especially for small businesses.
Divergent Objectives of Each Statement
Cash flow statements focus specifically on cash while funds flow statements look more broadly at working capital changes. The cash flow statement tracks the actual cash earned and spent by a company during a period. In contrast, the funds flow statement looks at the difference between current assets and current liabilities.
While the funds flow statement provides a summary of all changes in working capital, the cash flow statement zeroes in on cash transactions only. Understanding both provides a more complete picture, but cash flows are generally more critical in evaluating financial health.
Analyzing the Format and Components
The format and key building blocks of cash flow and funds flow statements have important differences:
Cash Flow Statement
- Classifies cash flows into operating, investing, and financing activities
- Shows inflows and outflows of cash
- Provides start and end cash balances
Funds Flow Statement
- Sources and applications (uses) of funds format
- Reflects working capital changes
- Does not show cash balances
The cash flow statement adheres to a standard format across businesses and industries. The funds flow statement tends to have greater variability in presentation.
Illustrating with a Practical Example
Below is a side-by-side comparison of a cash flow statement and funds flow statement for a fictional company.
Cash Flow Statement
| Cash Flows | Year 1 | Year 2 |
|---|---|---|
| Operating | $100,000 | $150,000 |
| Investing | $(50,000) | $(75,000) |
| Financing | $20,000 | $30,000 |
| Net Change in Cash | $70,000 | $105,000 |
| Beginning Cash | $20,000 | $90,000 |
| Ending Cash | $90,000 | $195,000 |
Funds Flow Statement
| Sources and Applications of Funds | Year 1 | Year 2 |
|---|---|---|
| Funds from Operations (Net Income) | $120,000 | $180,000 |
| Increase in Payables | $30,000 | $45,000 |
| Replacement of Equipment | $(50,000) | $(75,000) |
| Repayment of Debt | $(20,000) | $(30,000) |
| Net Change in Working Capital | $80,000 | $120,000 |
This illustrates the different objectives, formats, and components of each statement. While both offer valuable insights, the cash flow statement provides a direct look at cash that is critical for small business financial management.
Conclusion: Synthesizing the Cash Flow and Funds Flow Statements
To wrap up, the key takeaways when comparing cash flow statements vs funds flow statements are:
Reiterating the Prevalence of Cash Flow Statements
Cash flow statements tend to be more widely used and considered than funds flow statements in financial analysis. Cash flow statements provide insight into the actual cash inflows and outflows of a business over a period of time. They are a core financial statement that investors and creditors rely on to assess liquidity and solvency.
Acknowledging the Insights from Funds Flow Statements
While less common, funds flow statements also offer useful working capital and sources/uses information. They show how funds were obtained and utilized during a period, highlighting changes in working capital. Funds flow analysis helps determine what drove changes in cash.
Emphasizing the Importance of Understanding Both Statements
From objectives to components to format, cash flow statements and funds flow statements have distinct characteristics. It is valuable for financial analysts to understand these differences and recognize the unique insights both statements provide into a company's financial health and performance. Analyzing both statements leads to a more complete picture.
