Controlling the flow of funds through a business is an important management activity. An analyst may judge the overall quality of management by interpreting the clues about how successfully the management team brings funds into the company and how successfully management allocates those funds once raised. There are several financial statements that may assist the analyst in gathering clues about funds flow.
Funds Type Statements
Funds Type Statements are statements showing how funds flow through a business. Some examples include:
Examples of Funds Statements
- Statement of Changes in Financial Position
- Cash Flow Statement
- Funds Statement
Funds Flow
Statements showing flow of funds throughout a business may provide clues about the quality of management.
Sample Statements
Statement of Changes in Financial Position
| Statement of Changes in Financial Position Products, Inc. | April 2017 |
| Sources of Funds | |
|---|---|
| Net Income from Operations | $41,675 |
| Reduction in Cash | $15,000 |
| Reduction in Receivables | $44,855 |
| Reduction in Marketable Securities | $37,750 |
| Depreciation | $10,000 |
| Total | $149,280 |
| Uses of Funds | |
| Increase in Inventories | $93,280 |
| Increase in Fixed Assets | $22,000 |
| Decrease in Notes Payable | $24,000 |
| Decrease in Long-Term Debt | $10,000 |
| Total | $149,280 |
Cash Flow Statement
| Cash Flow Statement Products, Inc. | August 2017 |
| Cash Flows From Operations | |
|---|---|
| Net Income from Operations | $41,675 |
| Reduction in Receivables | $44,855 |
| Reduction in Marketable Securities | $37,750 |
| Depreciation | $10,000 |
| Increase in Inventories | − $93,280 |
| $41,000 | |
| Cash From Investing Activities | |
| Increase in Fixed Assets | − $22,000 |
| − $22,000 | |
| Cash From Financial Activities | |
| Decrease in Notes Payable | − $24,000 |
| Decrease in Long-Term Debt | − $10,000 |
| − $34,000 |
Funds Statement
| Funds Statement Products, Inc. | June 2017 |
| Sources of Funds | |
|---|---|
| Reduction in Accounts Receivables | $44,855 |
| Reduction in Inventory | $37,750 |
| Retained Earnings | $31,675 |
| Reduction in Cash | $15,000 |
| Total | $129,280 |
| Uses of Funds | |
| Payoff Long-Term Liabilities | $93,280 |
| Payoff Notes Payable | $24,000 |
| Purchase Fixed Assets | $12,000 |
| Total | $129,280 |
Constructing a Funds Statement
Constructing a Funds Statement
- Compare Two Balance Sheets
- Identify Changes in Each Item
- Classify Those Changes as Sources or Uses of Funds
- Assemble Information in Desired Format
- Analyze the Information
Sources and Uses of Funds
Sources of Funds
- Increase in a Claims Item
- Decrease in an Asset Item
Uses of Funds
- Increase in an Asset Item
- Decrease in a Claims Item
Classifying Changes
Example of Classifying Changes
In the Funds Statement example below, the cash account goes from $20,000 on the first, Beginning Balance Sheet to $5,000 on the second, Ending Balance Sheet. That is a decrease of $15,000. A decrease in an asset item is a source of funds. Other changes would be classified accordingly.
Funds Statement – Step 1
| Beginning Balance Sheet Products, Inc. | ||||
| Assets | Claims | |||
|---|---|---|---|---|
| Cash | $20,000 | Accounts Payable | $10,000 | |
| Marketable Securities | $10,000 | Accruals | $4,000 | |
| Receivables | $50,000 | Notes Payable | $24,000 | |
| Inventories | $70,000 | Long-Term Debt | $96,000 | |
| Fixed Assets | $160,000 | Common Stock | $64,000 | |
| Retained Earnings | $112,000 | |||
| Total Assets | $310,000 | Total Claims | $310,000 |
| Ending Balance Sheet Products, Inc. | ||||
| Assets | Claims | |||
|---|---|---|---|---|
| Cash | $5,000 | Accounts Payable | $10,000 | |
| Marketable Securities | $10,000 | Accruals | $4,000 | |
| Receivables | $5,145 | Notes Payable | $0 | |
| Inventories | $32,250 | Long-Term Debt | $2,720 | |
| Fixed Assets | $172,000 | Common Stock | $64,000 | |
| Retained Earnings | $143,675 | |||
| Total Assets | $224,395 | Total Claims | $224,395 |
Analyzing Information
When analyzing the information that goes into a funds statement, each item should be analyzed in detail and the overall impact of any change should be examined.
In the funds statement example below, the company appears to be profitable because retained earnings increased. Also, the company paid off a great deal of debt and purchased some fixed assets. To finance these moves, the company relied on reductions in inventory, receivables, and cash, as well as plowed earnings back into the firm.
Funds Statement – Step 2
| Sources and Uses of Funds | ||||
| Ending | Beginning | Source | Use | |
|---|---|---|---|---|
| Cash | $5,000 | $20,000 | $15,000 | |
| Marketable Securities | $10,000 | $10,000 | ||
| Receivables | $5,145 | $50,000 | $44,855 | |
| Inventories | $32,250 | $70,000 | $37,750 | |
| Fixed Assets | $172,000 | $160,000 | $12,000 | |
| Accounts Payable | $10,000 | $10,000 | ||
| Accruals | $4,000 | $4,000 | ||
| Notes Payable | $0 | $24,000 | $24,000 | |
| Long-Term Debt | $2,720 | $96,000 | $93,280 | |
| Common Stock | $64,000 | $64,000 | ||
| Retained Earnings | $143,675 | $112,000 | $31,675 |
This overview was developed by Dr. Sharon Garrison.
No adaptation of its content is permitted without permission.