Uses Of Funds Flow Statement
Funds flow statement helps the financial analyst in having a more detailed analysis and understanding of changes in the distribution of resources between two balance sheet dates. In case such study is required regarding the future working capital position of the company, a projected funds flow statement can be prepared. The uses of funds flow statement can be put as follows.
It explains the financial consequences of business operations. Funds flow statement provides a ready answer to so many conflicting situations, such as:
- Why the liquid position of the business is becoming more and more unbalanced inspite of business making more and more profits.
- How was it possible to distribute dividends in excess of current earnings or in the presence of a new loss for the period?
- How the business could have good liquid position in spite of business making losses or acquisition of fixed assets?
- Where have the profits gone?
Definite answers to these questions will help the financial analyst in advising his employer / client regarding directing of funds to those channels which will be most profitable for the business.
It answers intricate queries. The financial analyst can find out answers to a number of intricate questions.
- What is the overall credit-worthiness of the enterprise?
- What are the sources of prepayment of the loans taken?
- How much funds are generated through normal business operations?
- It what way the management has utilized the funds in the past and what are going to be likely use of funds?
- It acts as an instruments for allocation of resources.
- It is a test as to effective or otherwise use of working capital .
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