Cash Flow vs Fund Flow Statement: Comparison Table and Examples
A strong foundation in Commerce requires a clear understanding of essential financial statements like the Cash Flow Statement and Fund Flow Statement. Both statements serve vital roles in measuring a company’s financial performance and health, but their purposes, focus, and preparation methods are different.
Meaning of Cash Flow and Fund Flow Statements
A Cash Flow Statement tracks all actual inflows and outflows of cash and its equivalents within a period. This statement helps in understanding how a business is generating and utilizing cash from core activities, investments, and financing sources. On the other hand, a Fund Flow Statement presents the changes in a firm’s financial position over two balance sheet dates by analyzing the sources and applications of funds, where “funds” generally mean working capital (current assets minus current liabilities).
Key Differences: Cash Flow vs Fund Flow Statements
| Basis of Comparison | Cash Flow Statement | Fund Flow Statement |
|---|---|---|
| Meaning | Shows inflows and outflows of cash and cash equivalents within a period | Shows changes in working capital and sources/application of funds over a period |
| Focus | Short-term liquidity and actual cash movement | Overall financial position and movement in working capital |
| Basis of Accounting | Cash basis | Accrual basis |
| Objective | To measure liquidity and assess ability to meet immediate obligations | To identify long-term financial planning and structural changes |
| What is Measured? | Only actual cash and cash equivalent transactions | Movement and changes in funds, especially working capital |
| Result Shows | Reasons for changes in cash balance | Reasons for changes in net working capital |
Detailed Explanation with Examples
Cash flows are classified into three activities:
- Operating Activities: Relate to primary revenue-generating operations (e.g., cash from sales, payment to suppliers)
- Investing Activities: Involve the purchase or sale of long-term assets (e.g., buying machinery, selling investments)
- Financing Activities: Include funds raised from or returned to investors and creditors (e.g., issuing shares, repaying loans)
For instance, if a company sells old machinery for ₹50,000 and uses the proceeds to repay a creditor, both the cash inflow (from asset sale) and outflow (to repay creditor) are clearly reflected in the Cash Flow Statement under investing and financing activities, respectively.
In the Fund Flow Statement, this transaction affects working capital if credit terms differ or non-cash assets/liabilities are involved. For example, purchasing equipment on credit increases non-current assets and current liabilities, thus impacting working capital, but does not immediately change cash balance.
Formulas and Calculation Methods
| Statement | Formula |
|---|---|
| Net Cash Flow | Net Cash Inflows – Net Cash Outflows |
| Change in Working Capital | (Current Assets at End – Current Liabilities at End) – (Current Assets at Start – Current Liabilities at Start) |
Step-by-Step Approach to Preparing Statements
Preparing a Cash Flow Statement:
- Calculate cash flows from Operating Activities (using direct or indirect method).
- Identify cash from Investing Activities (asset purchases/sales).
- Record cash from Financing Activities (loans, shares, dividends, repayments).
- Total all three sections for net change in cash.
Preparing a Fund Flow Statement:
- Prepare a schedule of changes in working capital using balance sheet figures.
- List sources of funds (funds provided by operations, sales of assets, raising loans).
- List applications of funds (purchase of assets, redemption of loans, increasing working capital).
- Calculate net change in working capital and reconcile with balance sheet movement.
Key Principles and Applications
- Cash Flow Statements emphasize liquidity and actual solvency.
- Fund Flow Statements reveal how management allocates resources across periods and support strategic decisions.
- Non-cash items (like depreciation) are ignored in cash flow but adjusted in fund flow through operating results.
Practice Questions
- Classify each: payment of salary, purchase of machinery on credit, receipt from sale of investment – as per cash flow and fund flow perspectives.
- Prepare a cash flow statement given a list of transactions covering one year’s activities.
- Using two balance sheets, prepare a schedule of changes in working capital and construct a simple fund flow statement.
Next Steps and Vedantu Resources
For further learning, practice worksheet questions and use revision notes on Cash Flow and Fund Flow Statements available in Vedantu’s Accountancy resources. Understanding these concepts also supports advanced Commerce topics such as Difference Between Working Capital and Fund Flow and related areas in Economics and Business Studies.
A clear grasp of cash flow and fund flow concepts helps in analyzing business liquidity, planning finances, and succeeding in Commerce exams. Keep practicing with real business data and revise the principles regularly for mastery and better performance.
FAQs on Difference Between Cash Flow and Fund Flow Statements
1. What is the difference between cash flow and fund flow statement?
The main difference between cash flow and fund flow statement is their focus and purpose:
Cash flow statement shows the inflows and outflows of actual cash and cash equivalents during a specific period, categorized into operating, investing, and financing activities.
Fund flow statement analyzes the changes in an organization’s financial position by tracking sources and uses of working capital over two balance sheet dates. While cash flow focuses on liquidity, fund flow emphasizes financial health and working capital movement.
2. What is cash flow statement?
A cash flow statement is a financial report that details the receipt and payment of cash and cash equivalents during an accounting period.
Key points:
- Classifies cash movements into operating, investing, and financing activities.
- Helps assess short-term liquidity of a business.
- Prepared as per Accounting Standard 3 (AS-3, Revised).
3. What is fund flow statement?
A fund flow statement is a financial analysis tool that explains changes in the financial position (working capital) of a company between two balance sheet dates.
Key features:
- Shows sources and applications (uses) of funds.
- Focuses on changes in working capital, not just cash.
- Useful for understanding long-term financial strategies.
4. Is cash flow the same as profit?
No, cash flow is not the same as profit.
Profit measures the surplus after all expenses are deducted from revenue, based on the accrual accounting method. Cash flow refers to actual cash inflows and outflows, reflecting the real-time liquidity available to the business. Thus, a business can be profitable but still face cash shortages.
5. Why do we prepare fund flow statement if we have cash flow statement?
A fund flow statement provides insights that a cash flow statement does not:
- Tracks sources and uses of working capital
- Analyzes long-term financial planning and solvency
- Highlights movements in current assets and liabilities
6. What are the three types of activities in a cash flow statement?
The three types of activities in a cash flow statement are:
- Operating Activities: Primary business operations like sales, purchases, salary payments
- Investing Activities: Transactions involving purchase/sale of fixed assets, investments
- Financing Activities: Borrowings, repayment of loans, issue or redemption of shares and debentures
7. Which statement is mandatory as per Accounting Standards?
The cash flow statement is mandatory for listed companies and as per Accounting Standard 3 (AS-3, Revised). Fund flow statement is not mandatory but used for analysis and supplementary reporting.
8. What is working capital in fund flow statement?
Working capital is the difference between current assets and current liabilities. In a fund flow statement, changes in working capital showcase sources (increase) or uses (decrease) of funds for the period. Monitoring working capital is essential for assessing a company's short-term financial stability.
9. Give an example showing the difference between cash flow and fund flow statement treatment.
Example: If a company sells machinery for ₹1,00,000:
- In cash flow statement: The full amount (₹1,00,000) is recorded under Investing Activities as cash inflow.
- In fund flow statement: The sale is shown as a source of fund, affecting fixed assets and possibly working capital.
10. What are the main uses of cash flow statement?
The main uses of a cash flow statement include:
- Assessing liquidity and cash management efficiency
- Facilitating short-term decision-making
- Identifying sources and uses of cash in operating, investing, and financing activities
- Helping stakeholders evaluate the company’s ability to generate future cash flows
11. Is depreciation included in cash flow or fund flow statement?
Depreciation is a non-cash expense. In the cash flow statement, it is added back to net profit under operating activities to arrive at cash from operations. In the fund flow statement, it is treated as a source of funds because it reduces net profit without reducing cash.
12. How do you calculate net cash flow?
Net cash flow is calculated as:
Net Cash Flow = Total Cash Inflows – Total Cash Outflows
This can be applied for each of the three activities (operating, investing, and financing) and then summed for the final figure.
