What are the important Differences and Similarities between Cash flow and Fund flow

Recently updated on September 13th, 2023 at 08:10 pm

Cash Flow Statement

A cash flow statement is a financial statement that shows the inflow and outflow of cash and cash equivalents for a specific period of time, typically a quarter or a year. The statement provides information about a company’s liquidity, its ability to generate cash, and how it is using that cash. The cash flow statement is divided into three sections:

  1. Operating activities: This section shows the cash generated and used in the company’s main operations such as sales and production. It includes information on net income, changes in working capital accounts (such as accounts receivable, accounts payable, and inventory), and non-cash items such as depreciation and amortization.
  2. Investing activities: This section shows the cash generated or used by a company’s investments in long-term assets, such as buying or selling property, plant, and equipment or investments in other companies.
  3. Financing activities: This section shows the cash generated or used by a company’s financing activities, such as issuing or repurchasing stock, issuing or repaying debt, or paying dividends.

The elements of cash flow include:

  1. Operating cash flow: This includes cash generated from the company’s main operations such as sales and production.
  2. Investing cash flow: This includes cash used for investments such as buying new equipment or investing in other companies.
  3. Financing cash flow: This includes cash from financing activities such as issuing new stock or taking out loans.
  4. Net cash flow: This is the overall change in cash for a period and is calculated by subtracting the cash used in investing and financing activities from the cash generated from operating activities.

Calculation of Cash from Operating Activities

The cash flow from operating activities is typically calculated using the indirect method, which starts with net income (or loss) and then adjusts for non-cash items and changes in working capital. The formula for the indirect method is:

Net Cash Flow from Operating Activities = Net Income (or Loss) + Depreciation + Amortization + Deferred Taxes + Changes in Working Capital (e.g. accounts receivable, accounts payable, inventory)

The direct method is also used to calculate the cash flow from operating activities, this method is relatively more detailed and it involves the cash inflow and outflow from the company’s main operations such as sales, expenses, and others.

The cash flow statement is important because it provides information about a company’s ability to generate cash and how it is using that cash. It can also be used to assess a company’s liquidity, which is its ability to meet its short-term obligations, and to identify trends in a company’s cash flow. Furthermore, it can also be used to evaluate the performance of a company’s management, by looking at how they manage their cash and how they fund their investments and operations.

Format:

Cash Flow Statement

For the period ending December 31, 20XX

Cash Flow from Operating Activities Net Income (Loss) $XXX

Adjustments for: Depreciation $XXX

Amortization $XXX

Change in Accounts Receivable $XXX

Change in Accounts Payable $XXX

Change in Inventory $XXX

Net cash provided by operating activities $XXX

Cash Flow from Investing Activities Proceeds from Sale of Equipment $XXX

Purchase of Investment $XXX

Net cash used in investing activities $XXX

Cash Flow from Financing Activities Proceeds from Issuance of Stock $XXX

Proceeds from Issuance of Bonds $XXX Payment of Dividends $XXX

Repayment of Long-term Debt $XXX

Net cash provided by financing activities $XXX

Net increase (decrease) in cash and cash equivalents $XXX

Cash and cash equivalents at beginning of period $XXX

Cash and cash equivalents at end of period $XXX

It is worth noting that different companies may use different format, but the main elements and sections should remain the same.

Fund Flow Statement

The Fund Flow Statement, also known as the Statement of Changes in Financial Position, is a financial statement that shows the inflow and outflow of cash and cash equivalents of a company during a specific period of time, such as a quarter or a year. It helps to understand the company’s ability to generate cash, as well as how it is using that cash. The statement typically includes information on cash from operating activities, investing activities, and financing activities. This statement is important for investors and analysts as it helps them to understand the company’s liquidity and solvency.

Calculation of Fund Flow Statement

A fund flow statement, also known as a statement of changes in financial position, is a financial statement that shows the changes in a company’s working capital and cash position over a specific period of time. It is used to assess a company’s liquidity and solvency, and to identify any trends in cash and working capital management.

The fund flow statement is typically calculated using the following steps:

  1. Start with the beginning cash balance: This is the cash balance at the beginning of the period being reported on.
  2. Add cash inflow from operating activities: This includes cash generated from the company’s main operations such as sales and production.
  3. Subtract cash outflow from operating activities: This includes cash used for expenses such as salaries, rent, and utilities.
  4. Add cash inflow from investing activities: This includes cash from the sale of investments or the collection of loans made to other entities.
  5. Subtract cash outflow from investing activities: This includes cash used to purchase investments or make loans to other entities.
  6. Add cash inflow from financing activities: This includes cash from the issuance of new stock or the collection of loans.
  7. Subtract cash outflow from financing activities: This includes cash used to repurchase stock or pay off loans.
  8. The final amount is the end cash balance.

A fund flow statement, also known as a statement of changes in financial position, is a financial statement that shows the changes in a company’s working capital and cash position over a specific period of time. It is used to assess a company’s liquidity and solvency, and to identify any trends in cash and working capital management.

An example of a fund flow statement format would be:

Fund Flow Statement

For the period ending December 31, 20XX

Sources of Funds

  1. Increase in Share Capital $XXX
  2. Increase in Long-term Borrowings $XXX
  3. Increase in Current Liabilities $XXX
  4. Net Profit for the Period $XXX Total Sources of Funds $XXX

Application of Funds

  1. Purchase of Fixed Assets $XXX
  2. Investment in Securities $XXX
  3. Increase in Current Assets $XXX
  4. Repayment of Long-term Borrowings $XXX Total Application of Funds $XXX

Net Increase (Decrease) in Working Capital $XXX

Important Differences between Cash Flow Statement and Fund Flow Statement

Feature

Cash Flow Statement

Fund Flow Statement

Purpose Shows inflow and outflow of cash Shows the changes in the working capital
Time Horizon Short-term (usually a year) Short-term (usually a year)
Components Operating activities, investing activities, financing activities Sources and uses of funds
Relationship with other financial statements Complements the balance sheet and income statement Complements the balance sheet
Shows Liquidity of a company Solvency of a company
Emphasis Cash and cash equivalents Working capital
Information reported Cash and cash equivalents, receivables, payables, investments Current assets, current liabilities, long-term liabilities, net working capital.

A cash flow statement and a fund flow statement are both financial statements that provide information on a company’s financial position and liquidity. However, there are key differences between the two statements:

  1. Purpose: The main purpose of a cash flow statement is to show the inflow and outflow of cash during a specific period of time, while the main purpose of a fund flow statement is to show the changes in a company’s working capital and cash position over a specific period of time.
  2. Format: A cash flow statement typically includes three sections: cash flow from operating activities, cash flow from investing activities, and cash flow from financing activities. A fund flow statement typically includes two sections: sources of funds and application of funds.
  3. Information provided: A cash flow statement provides information on a company’s cash balance at the beginning and end of a specific period, as well as cash generated and used in operating, investing, and financing activities. A fund flow statement provides information on a company’s working capital and cash position at the beginning and end of a specific period, as well as the sources and uses of funds during that period.
  4. Analysis: A cash flow statement is used to assess a company’s liquidity and ability to generate cash, while a fund flow statement is used to assess a company’s liquidity and solvency, and to identify any trends in cash and working capital management.
  5. Timing: Cash flow statement is prepared periodically (monthly, quarterly, annually) while Fund flow statement is prepared at the end of the financial year.

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