Cash Flow & Funds Flow | PAPER III – ACCOUNTING & FINANCIAL MANAGEMENT FOR BANKERS | MODULE B: FINANCIAL STATEMENTS AND CORE BANKING SYSTEMS

Cash Flow & Funds Flow

---

1. Introduction

Cash Flow and Funds Flow statements are crucial financial tools used to assess the liquidity and financial health of an organization. They provide insights into the inflow and outflow of cash and the movement of working capital, respectively.

2. Cash Flow Statement

The Cash Flow Statement shows the changes in cash and cash equivalents during a particular period. It is classified into three activities:

• Operating Activities: Cash generated from day-to-day operations.
• Investing Activities: Cash used in or generated from the purchase/sale of assets.
• Financing Activities: Cash received from or repaid to investors and creditors.

Example:

ABC Ltd. has the following cash flows in a year:

• Cash from operations: ₹100,000
• Purchase of equipment: ₹40,000
• Loan repayment: ₹20,000
• Equity issued: ₹30,000

Mathematical Illustration:

Net Cash Flow = Cash from Operations + Cash from Financing - Cash used in Investing
              = ₹100,000 + ₹30,000 - ₹40,000 - ₹20,000
              = ₹70,000
    

3. Funds Flow Statement

The Funds Flow Statement analyzes the changes in financial position between two balance sheet dates. It tracks the flow of funds, where funds mean working capital.

• Increase in working capital indicates sources of funds.
• Decrease in working capital indicates uses of funds.

Example:

Working Capital on 1st Jan: ₹50,000
Working Capital on 31st Dec: ₹70,000

Increase in working capital: ₹20,000 (use of funds)

4. Key Differences

• Cash Flow focuses on cash movements; Funds Flow focuses on changes in working capital.
• Cash Flow is used for short-term liquidity analysis; Funds Flow is used for long-term financial planning.

5. Analysis

Cash Flow Analysis helps in understanding liquidity position and cash availability for operations, investments, and financing. Fund Flow Analysis reveals how resources are generated and utilized across long-term activities.

6. MCQs – Cash Flow & Funds Flow

1. Which of the following is included under operating activities in a cash flow statement?
   A. Purchase of machinery
   B. Issuance of shares
   C. Interest received
   D. Payment of dividends
   Answer: C
2. Fund flow statement is prepared to analyze:
   A. Profitability
   B. Liquidity
   C. Changes in working capital
   D. Cash surplus
   Answer: C
3. Cash flow from financing activities includes:
   A. Interest paid
   B. Dividend received
   C. Sale of fixed assets
   D. Proceeds from issue of shares
   Answer: D
4. Funds in a funds flow statement refer to:
   A. Cash only
   B. Bank balance only
   C. Working capital
   D. Gross profit
   Answer: C
5. If current liabilities increase, it results in:
   A. Use of funds
   B. Source of funds
   C. No impact
   D. Loss of capital
   Answer: B
6. Cash flow statements are prepared as per:
   A. Accounting Standard 3
   B. Accounting Standard 2
   C. IFRS 2
   D. Indian GAAP 4
   Answer: A
7. The main objective of preparing cash flow statement is to:
   A. Know profit earned
   B. Know total assets
   C. Know cash position
   D. Know sales turnover
   Answer: C
8. Which of the following will be shown in fund flow statement but not in cash flow?
   A. Depreciation
   B. Changes in working capital
   C. Purchase of land
   D. Cash sales
   Answer: B
9. Which activity is classified under investing activity?
   A. Rent received
   B. Sale of building
   C. Wages paid
   D. Interest paid
   Answer: B
10. Increase in current assets leads to:
    A. Increase in funds
    B. Use of funds
    C. Increase in liabilities
    D. No effect on funds
    Answer: B