Funds flow statement also describes the foundations from which extra working capital has got financed. These statements are especially significant to assess a firm’s growth, its resulting financial requirements, and to determine the finest method of financing these requirements.
At a time when the management makes use of some projected funds flow statements, they can be aware of the inadequacy or adequacy of working capital. With it, a person can plan the long-term and intermediate financing of the firms, allocation of resources, businesses’ expansion, and repayment of long-term debts.
Steps Involved in Preparing Funds Flow Statement
Some steps that are included in preparing the funds flow statement are:
- Regulate the changes in working capital.
- For every non-current account mentioned on the balance sheet, form the decrease or increase in that account. Examine the alterations to make out whether or not it is a decrease (use) or increase (source) of working capital.
- Make out the adjustments account which is made to the net income.
Aims of Funds Flow Statement
The question that remains unanswered is why do people prepare the funds flow statement? The importance of funds flow statement arises because the loss and profit and balance sheet don’t explain the reasons that happen in the financial positions. The balance sheet and profit and loss do give a couple of figures for the previous years and current year.
Commonly, the funds flow statement provides people the following information:
- Sources of funds – Sources of funds tell people the source from where funds have emerged.
- Application of funds – Application of funds explains people the places where these funds were utilized.
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