How to analyse a funds flow statement?

Funds flow statement takes both cash and non-cash items for accounting. Funds flow statement is used to examine the funds precisely available for working capital from long-term sources. It also enables  assessment of an entity’s ability to meet long-term obligations. The funds flow takes place only when there is an increase or decrease in working capital owing to movements in long-term sources and uses (application of funds) of funds.

Funds flow statement is also known as the statement of sources and application of funds (uses). It   takes both cash and non-cash items for accounting.From funds flow statements banks can verify that the long-term uses of funds are covered only by long-term sources of funds. The Funds flow statement are explained below with illustrations.

If the long-term source is not increased during the period and term liability is reduced or non-current assets are increased it indicates that short-term source is utilized for long term source. In bankers parlance using short-term source for long term use is  the diversion of funds which has  the dire consequence towards the operation of the entity. The change in working capital is normally assigned to management’s decisions on sources and uses of funds.Note: Term loan/DPG installments falling due within one year to be treated as current liabilities.

Illustration of funds flow statement: