Financial Management

Topics: Balance sheet, Generally Accepted Accounting Principles, Financial statements Pages: 15 (4381 words) Published: January 31, 2015
National Institute of Business Management
Chennai - 020
Subject : Financial Management

Attend any 4 questions. Each question carries 25 marks
(Each answer should be of minimum 2 pages / of 300 words)

1. What are the significant factors of Financial Statements? Discuss the various tools of financial Analysis. 2. What is a Fund Flow Statement? Discuss the uses and preparation of Fund Flow Statements. Answer 2-

Definition of Fund

Fund means working capital. If current assets of company is more than current liability of business, it is called working capital and working capital’s other name is Fund.

Fund = Working capital = Current assets – Current liability

Definition of Flow of Fund

Flow of fund means movement of fund. I take the example of air; we can feel its movement or flow of air. Same thing is happen with fund, due to the activity of business fund is transfer from one asset to another assets. If fixed assets are converted into current asset or fixed liability is converted into current liabilities, these are the flow of fund. But if current assets are changed with current assets or current assets are changed into current liabilities, then, there is no flow of fund because there is no change working capital. Suppose, we get the money from debtor, this is not flow of fund because, working capital is not changed. Both items of current assets and when current assets change into current assets, there will not be change in working capital.

Flow of Fund = Fixed asset changes into current asset or current asset changes into fixed assets


Fixed liability changes into current liability or current liability changes into fixed liability.

Definition of fund flow statement

Fund flow statement is a statement which shows the inflow and out flow of funds between two dates of balance sheet. So, it is known as the statement of changes in financial position. We all know that balance sheet shows our financial position and inflow and outflow of fund affects it. So, in company level business, it is very necessary to prepare fund flow statement to know what the sources are and what are applications of fund between two dates of balance sheet. Generally, it is prepare after getting two year balance sheet.Fund flow statements are known with different names -Statement of source and uses of funds Or summary of financial operations -Movement of working capital statement Or Fund received and distributed statement Or Fund generated and expended statement.

Uses of fund flow statement

Funds flow statement is an important financial tool, which analyze the changes in financial position of a firm showing the sources and applications of its funds. It provides useful information about the firm's operating, financing and investing activities during a particular period. The following points highlight the importance of funds flow statement.

1. Funds flow statement helps in identifying the change in level of current assets investment and current liabilities financing. 2. Funds flow statement helps in analyzing the changes in working capital level of a firm. 3. Funds flow statement shows the relationship of net income to the changes in funds from business operation. 4. Funds flow statement reports about past fund flow as an aid to predict future funds flow. 5. Funds flow statement helps in determining the firms' ability to pay interest and dividend, and pay debt when they become due. 6. Funds flow statement shows the firms' ability to generate long-term financing to satisfy the investment in long-term assets. 7. Funds flow statements helps in identifying the factor responsiblefor changes in assets, liabilities and owners' equity at two balance sheet date.

Steps for making Fund flow statement

First Step

Making of statement of Changes of Working Capital

For making of fund flow statement. It is very necessary to make statement of changes of working capital. Because net...
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