A fund flow statement is a summary of a firm’s inflow and outflow of funds. In other words, fund flow is a statement which analyzes the inflow and outflow of funds of an organization or firm in a particular period.
The fund flow statement suffers from the following limitations:
1. The fund flow statement is prepared with the help of balance sheet and profit and loss account of the current period and these statements are based on historical cost. So a realistic comparison of profitability and the funds position is not possible as the current cost is not considered for the purpose of preparation of fund flow statement.
2. The cash position of the firm is not revealed by fund flow statement. To know the cash position a cash flow statement has to be prepared.
3. The various activities are not classified as operating activities, investing activities and financing activities while preparing fund flow statement.
1. The users of fund flow statement, such as investors, creditors, bankers, government, etc., can understand the managerial decisions regarding dividend distribution, utilization of funds and earning capacity with the help of fund flow statement.
2. The quantum of working capital is revealed by the schedule of working capital changes, which is a part of fund flow statement.
3. The fund flow statement is the best and first source for judging the repaying capacity of an enterprise.
4. The management will be able to detect surplus/shortage of fund balance.
5. The fund from operation is not mentioned in the profit and loss account and balance sheet but it is separately calculated for the purpose of fund flow statement.