Funds flow statement, also referred to as the statement of changes in financial position or the statement of sources and uses of funds, gives a clear picture of the movement of funds in a certain period. A simple funds flow statement can be arrived at by comparing the balance sheets at the stating of the period with the balance sheet at the ending of the period. The term fund refers to net working capital.
Funds Flow Statements is prepared in two parts – The first one is sources of Funds and the other is Uses of Funds or Application of funds. The difference of these two parts is change in working capital. When sources of funds exceed the application of funds, it is increase in working capital and when application of funds exceeds the sources, it is decrease in working capital. Funds Flow Statement presents those items only which affect the working capital. If any transaction does not affect the working capital at all i.e., if it results in increase or decrease in both current assets and current liabilities (such as payment to creditors) or it affects only fixed assets and fixed liabilities (such as conversion of debentures into shares, or shares into stocks or vice versa, issue of bonus shares, purchase of fixed assets like building or machinery by issue of shares or debentures etc.), it is not to be shown in funds Flow Statement.