Distinguish between Cash Flow and Fund Flow statement.

Answer The points of distinction between cash flow and funds flow statement are as below: Cash flow statement (i) It ascertains the changes in balance of cash in hand and bank (ii) It analyses the reasons for changes in balance of cash in hand and bank (iii) It shows the inflows and outflows of cash. (iv) It is an important tool for short term analysis Funds flow statement (i) It ascertains the changes in financial position between two accounting periods. (ii) It analyses the reasons for change in financial position between two balance sheets (iii) It reveals the sources and application of finds. . (iv) It helps to test whether working capital has been effectively used or not.

(v) The two significant areas of analysis are cash generating efficiency and free cash flow.

Cash Flow and Funds Flow Statements Both funds flow and cash flow statements are used in analysis of past transactions of a business firm. The differences between these two statements are given below: 1. Funds flow statement is based on the accrual accounting system. In case of preparation of cash flow statements all transactions effecting the cash or cash equivalents only is taken into consideration. 2. Funds flow statement analyses the sources and application of funds of long-term nature and the net increase or decrease in long-term funds will be reflected on the working capital of the firm. The cash flow statement will only consider the increase or decrease in current assets and current liabilities in calculating the cash flow of funds from operations. 3. Funds Flow analysis is more useful for long range financial planning. Cash flow analysis is more useful for identifying and correcting the current liquidity problems of the firm. 4. Funds flow statement tallies the funds generated from various sources with various uses to which they are put. Cash flow statement starts with the opening balance of cash by proceeding through sources and uses.

Comparative Financial Statement Analysis Comparative Financial Statement analysis provides information to assess the direction of change in the business. Financial statements are presented as on a particular date for a particular period. The financial statement Balance Sheet indicates the financial position as at the end of an accounting period and the financial statement Income Statement shows the operating and non-operating results for a period. But financial managers and top management are also interested in knowing whether the business is moving in a favorable or an unfavorable direction. For this purpose, figures of current year have to be compared with those of the previous years. In analyzing this way, comparative financial statements are prepared. Comparative Financial Statement Analysis is also called as Horizontal analysis. The Comparative Financial Statement provides information about two or more years' figures as well as any increase or decrease from the previous year's figure and it's percentage of increase or decrease. This kind of analysis helps in identifying the major improvements and weaknesses. For example, if net income of a particular year has decreased from its previous year, despite an increase in sales during the year, is a matter of serious concern. Comparative financial statement analysis in such situations helps to find out where costs have increased which has resulted in lower net income than the previous year.

Example:
Comparative Income Statement for the years ended 31st Dec 2008 & 31st Dec 2009 31st Dec 2008 Sales Less: Cost of goods sold Gross profit Less: Operating expenses General & administrative expenses Selling & distribution expenses Other operating expenses Operating profit Less: Interest expenses Net income before taxes Less: Taxes at 30% Net Income after taxes $7,000 $5,000 $2,000 $200 $400 $100 $1,300 $300 $1,000 $300 $700 31st Dec 2009 % of Increase/ increase / (Decrease) (decrease) $9,000 $2,000 28.57% $6,400 $1,400 28.00% $2,600 $600 30.00% $300 $500 $150 $1,650 $400 $1,250 $375 $875 $100 $100 $50 $350 $100 $250 $75 $175 50.00% 25.00% 50.00% 26.92% 33.33% 25.00% 25.00% 25.00%

Comparative Balance Sheets as on 31st Dec 2008 & 31st Dec 2009 31st Dec 2008 Current Assets: Cash Accounts Receivables Inventory Total Current Assets Fixed Assets: Buildings Furnitures & office equipments Total Fixed Assets Total Assets Liabilities: Current Liabilities: Accounts Payable Notes Payable $500 $2,000 $1,500 $4,000 $3,000 $1,000 $4,000 $8,000 % of 31st Dec Increase / increase / 2009 (Decrease) (decrease) $600 $3,000 $2,500 $6,100 $4,000 $1,500 $5,500 $11,600 $100 $1,000 $1,000 $2,100 $1,000 $500 $1,500 $3,600 20.00% 50.00% 66.67% 52.50% 33.33% 50.00% 37.50% 45.00%

$1,000 $500

$1,200 $500

$200 $0

20.00% 0.00%

Interest Payable Total Current Liabilities Shareholder's Equity: Common Stock Retained earnings Total Stockholder's equity Total Liabilities & Stockholder's equity

$100 $1,600 $5,000 $1,400 $6,400 $8,000

$120 $1,820 $7,500 $2,280 $9,780 $11,600

$20 $220 $2,500 $880 $3,380 $3,600

20.00% 13.75% 50.00% 62.86% 52.81% 45.00%