FUNDS FLOW STATEMENTS:
1. INCOME
STATEMENT:
An income statement measures the inflows and outflows of net
assets resulting from rendering of goods or services to customers over a period
of time.
2. FUNDS
FLOW STATEMENT:
This statement measures the inflows and outflows of net
working capital that result from any type of business activity.
3.STATEMENT
OF CAHNGES IN FINANCIAL POSITION:
This statement has a wider meaning than a fund flow
statement. It measures changes both in
working capital and non-working capital.
4. CASHFLOW
STATEMENT: (statement of changes in financial position)
This Statement measures inflows and outflows of cash on
account of any type of business activity.
5. MEANING
OF CASH FLOW STATEMENT:
A cash flow statement is a statement depicting change in
cash position from one period to another.
DIFFERENCES BETWEEN FUNDS FLOW ANALYSIS AND CASH FLOW
ANALYSIS:
1. A cash
flow statement is concerned only with the change in cash position while a fund
flow statement is concerned with change in working capital position between two
balance sheet dates.
2. A cash
flow statement is merely a record of cash and disbursements. While studying the short-term solvency of a
business one is interested not only in cash balance but also in the assets,
which can be easily converted into cash.
3. Cash flow
analysis is more useful to the management as tool of financial analysis is
short period as compared to fund flow analysis.
4. Cash is a
part of working capital and, therefore, an improvement in cash position results
in improvement in the funds position but the reverse is not true. In other words, inflow of cash results in
inflow of funds but inflow of funds may not necessarily inflow of cash.
5. Another
distinction between a cash flow analysis and a fund flow analysis can be made
on the basis of the techniques of their preparation. An increase in a current liability or
decrease in a current asset results in decrease in working capital
vice-versa. While an increase in a
current liability or decrease in current asset (other than cash) will result in
increase in cash and vice-versa.
OVERTRADING:
Overtrading means an attempt to maintain or expand scale of
operations of the business with insufficient cash resources. Normally concerns having overtrading have a
high turnover ratio and a low current ratio.
In this situation like this, the company; is not in a position to
maintain proper stocks of materials, finished goods etc., Overtrading has been
amply described as “over blowing the balloon”.
CAUSES:
1. Depletion
of working capital
2. Faulty
financial policy
3. Using WC
to purchase of fixed assets.
4. Over
expansion
5. Inflation
and rising prices.
6. Excessive
Taxation.
CONSEQUENCES:
1. Difficulty
in paying wages & Taxes
2. Costly
Purchases
3. Reduction
in Sales
4. Difficulties
in making payments
5. Obsolete
plant and Machinery
UNDERTRADING:
It is reverse of overtrading. It means improper and underutilization of
funds lying at the disposal of the undertaking.
In such a situation the level of trading is low as compared capital
employed in the business. It results in
the size of inventories, book debts and cash balances. Under trading is a matter of fact an aspect
of overcapitalization. The basic cause
of under trading is, therefore underutilization of firm’s resources.
CAUSES:
1. Conservative
policies followed by management
2. Non
availability of basic facilities necessary for production
3. General
depression in the market resulting in fall in the demand of company’s product.
CONSEQUENCES:
1. The
profits of the firm show a declining trend resulting in a lower return on
capital employed
2. The value
of the shares of the company on the stock exchange falling on account of lower profitability.
3. Impression
in the minds of investors that the management is in efficient.
As per TANDON Committee permissible bank borrowings on
working capital norms:
I. 75%(current
assets – current liabilities) (i.e. 75% of WC)
II. 75% of
CURRENT ASSETS – CURRENT LIABILITIES
III. 75%(Current
assets – core current assets) – current liabilities
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