The Key Differences Between Cash Flow Statement and Funds Flow Statement
When it comes to financial statements, businesses use two main tools to assess their liquidity and financial stability: the cash flow statement and the funds flow statement. While they may sound similar, they serve different objectives and provide distinct types of information.
Cash Flow Statement
The cash flow statement documents the inflow and outflow of cash that a company experiences during a specific period. It shows where the cash is coming from and where it is being spent. This statement can be divided into three categories: operating activities, investing activities, and financing activities.
The operating activities section shows the cash inflows and outflows from the company’s primary operations, such as revenue and expenses, while the investing activities section displays the cash flow related to investments, such as buying or selling assets. The financing activities section covers cash flow tied to raising capital, such as borrowing money or issuing equity.
Funds Flow Statement
The funds flow statement, on the other hand, focuses on changes in working capital, which is essentially the difference between a company’s current assets and liabilities. It shows how the company’s funds are being used and from where they are coming.
A funds flow statement covers two parts, sources, and applications. Sources refer to the funds that are coming in while applications refer to the funds that are going out. Sources can include selling assets, issuing shares, or receiving loans, while applications can include paying down debts, purchasing assets, and paying dividends.
The Key Differences
The primary difference between the two statements is that the cash flow statement provides a detailed guide to a company’s cash inflows and outflows, while the funds flow statement shows how the company’s funds are being utilized and from where they are originating. Cash flow statements focus on movements of cash, while funds flow statements focus on changes in working capital.
Another key difference is in the scope of each statement. The cash flow statement covers a shorter period, usually a quarter or a year, while the funds flow statement covers a more extended period, typically a year or more.
Last but not least, the cash flow statement deals with the actual cash transactions during a specific period, while the funds flow statement provides an overview of the changes in working capital.
In conclusion, the cash flow statement and the funds flow statement are both essential tools for businesses. While they do have similarities, they serve different objectives and provide distinct types of information. Both statements can provide a holistic picture of a company’s financial standing and enable business owners to make informed decisions regarding managing their financial resources.
Table difference between cash flow statement and funds flow statement
| Point of Difference | Cash Flow Statement | Funds Flow Statement |
|---|---|---|
| Purpose | To track the incoming and outgoing cash flow from operating, investing, and financing activities | To track the changes in working capital and long-term funds of an organization |
| Category of transactions | Only cash transactions are considered | Both cash and non-cash transactions are considered |
| Time period | Covers a specific period of time, usually a financial year | Covers a longer period of time, from the beginning of a financial year to the end of the current year |
| Scope | Limited scope that only highlights the cash flow of an organization | Wider scope that includes both capital and revenue transactions |
| Preparation methods | Direct and Indirect methods can be used for preparation | Only indirect method can be used for preparation |
| Usefulness | Helps in assessing the liquidity and solvency of an organization | Helps in assessing the long-term financial position and financial stability of an organization |