Introduction to Cash Flow and Fund Flow Statements

Cash Flow Statement and Fund Flow Statement are essential tools in financial analysis, providing insights into an entity’s liquidity, solvency, and resource management. While both statements track changes in financial position, they differ in focus: Cash Flow emphasizes actual cash movements, whereas Fund Flow highlights changes in working capital (funds).

• Historical Context: Cash Flow Statements gained prominence post-1980s scandals (e.g., emphasizing cash over accruals), mandated globally via standards like IAS 7 (1977, revised). Fund Flow, an older concept, was popular pre-1990s but largely replaced by Cash Flow in modern reporting.
• Purpose: These statements aid in assessing operational efficiency, investment decisions, and financing strategies. They are vital for stakeholders like investors, creditors, and regulators.
• Regulatory Framework: Cash Flow is mandatory under Ind AS 7 (converged with IAS 7) for Ind AS adopters (listed/large companies). Fund Flow is not mandatory but used for internal analysis or legacy reporting.

Cash Flow Statement

The Cash Flow Statement reports inflows and outflows of cash and cash equivalents over a period, classified into operating, investing, and financing activities. It reconciles opening and closing cash balances, revealing how cash is generated and utilized.

Definition and Purpose

• Definition: As per Ind AS 7 / IAS 7, it’s a statement showing changes in cash and cash equivalents from transactions and events.
• Cash and Cash Equivalents: Includes cash on hand, demand deposits, short-term (≤3 months maturity) highly liquid investments convertible to cash with insignificant risk (e.g., treasury bills). Excludes bank overdrafts unless integral to cash management.
• Purpose:
  • Assess liquidity and solvency.
  • Evaluate cash generation from operations vs. accruals.
  • Aid in forecasting future cash needs.
  • Detect mismatches between profit and cash (e.g., high profits but low cash due to receivables).
• Benefits: Complements Income Statement (accrual-based) and Balance Sheet; useful for ratio analysis like Cash Flow Coverage Ratio.

Classification of Cash Flows (per Ind AS 7 / IAS 7)

Cash flows are categorized to reflect business activities:

Category	Description	Examples
Operating Activities	Core business operations generating revenue. Primary source of cash inflows.	Cash from sales, payments to suppliers/employees, interest/tax payments. Adjust for non-cash items (e.g., depreciation).
Investing Activities	Acquisition/disposal of long-term assets/investments. Often cash outflows.	Purchase/sale of PPE, investments in securities, loans advanced/received.
Financing Activities	Changes in equity/debt structure. Includes owner/lender transactions.	Issue/repayment of shares/debentures, dividends paid, lease liabilities.

• Non-Cash Transactions: Excluded from statement but disclosed separately (e.g., asset acquisition via shares).

Methods of Preparation

Two methods for Operating Activities; Investing/Financing use direct approach.

1. Direct Method:
   • Lists gross cash receipts/payments.
   • Formula: Cash from Operations = Cash Receipts from Customers – Cash Paid to Suppliers/Employees – Other Operating Expenses + Other Income.
   • Preferred by IASB for transparency but less common due to data needs.
2. Indirect Method (Most Used):
   • Starts with Net Profit, adjusts for non-cash items and working capital changes.
   • Steps:
     • Start with Profit Before Tax.
     • Add back non-cash expenses (depreciation, amortization, provisions).
     • Deduct non-cash incomes (profit on sale of assets).
     • Adjust for working capital: (-) Increase in current assets / (+) Decrease; (+) Increase in current liabilities / (-) Decrease.
     • Subtract interest/tax paid (classified as operating unless specific).

Example Preparation (Indirect Method): Company XYZ: Net Profit ₹50,000; Depreciation ₹10,000; Increase in Receivables ₹5,000; Decrease in Payables ₹3,000; Sale of Asset (cash inflow ₹20,000, profit ₹5,000); New Loan ₹30,000; Dividend Paid ₹10,000.

• Operating: 50,000 + 10,000 – 5,000 (profit on sale) + 5,000 (rec. inc.) – 3,000 (pay. dec.) = ₹57,000
• Investing: +20,000 (asset sale)
• Financing: +30,000 – 10,000 = +20,000
• Net Increase in Cash: 57,000 + 20,000 + 20,000 = ₹97,000

Recent Developments (as of July 2025)

• Ind AS 7 Amendments (2025): Via Companies (Indian Accounting Standards) Amendment Rules, 2025, effective April 1, 2025 (FY 2025-26). Key changes: Enhanced disclosures for non-cash transactions; mandatory reconciliation of liabilities from financing activities (e.g., changes in debt due to accruals/exchanges).efiletax.in Applies to Ind AS entities.
• IAS 7 Updates: IASB’s May 2025 review focuses on improving disaggregation of cash flows, non-cash info transparency, and consistent classification. No expansion of ‘cash equivalents’ definition or segment-wise cash flows. Ongoing project; potential amendments post-2025.ifrs.org Supplier Finance Arrangements (amendments to IAS 7/IFRS 7, effective 2024) require liquidity risk disclosures, converged in Ind AS.

Exam Tip: Memorize formats; practice adjustments. Link to PFRDA (cash flows in pension investments) or RBI (bank liquidity).

Fund Flow Statement

Fund Flow Statement analyzes sources and applications of funds (working capital), showing how long-term funds finance operations and expansions.

Definition and Purpose

• Definition: Statement of changes in financial position based on working capital (Current Assets – Current Liabilities).
• Funds: Broadly, working capital; narrowly, long-term funds.
• Purpose:
  • Track sources (e.g., fund inflows) and uses (outflows).
  • Reveal financing of fixed assets/working capital.
  • Useful for long-term planning; highlights over/under-capitalization.
• Limitations: Ignores cash specifics; accrual-based; not mandatory.

Components

• Sources of Funds: Inflows increasing working capital (e.g., issue of shares/debentures, sale of assets, operating profits).
• Applications of Funds: Outflows decreasing working capital (e.g., purchase of assets, repayment of loans, dividends, operating losses).

Preparation Steps

1. Calculate Change in Working Capital: (Closing WC – Opening WC).
2. Prepare Adjusted Profit & Loss: Start with Net Profit; add back non-fund items (depreciation, provisions); deduct non-fund incomes.
3. Schedule of Changes in Working Capital: Itemize increases/decreases in CA/CL.
4. Fund Flow Statement: Sources = Applications + Increase in WC (or – Decrease).

Example: Opening WC ₹1,00,000; Closing ₹1,20,000 (Increase ₹20,000). Sources: Profit ₹50,000; Share Issue ₹30,000; Asset Sale ₹10,000 = ₹90,000. Applications: Asset Purchase ₹40,000; Loan Repay ₹30,000 = ₹70,000. Reconciliation: Sources ₹90,000 = Applications ₹70,000 + WC Increase ₹20,000.

Exam Tip: Focus on adjustments for non-current items; common in BPSC/State PCS for analytical questions.

Differences Between Cash Flow and Fund Flow Statements

Aspect	Cash Flow Statement	Fund Flow Statement
Basis	Cash and cash equivalents	Working capital (funds)
Focus	Short-term liquidity	Long-term financial position
Standard	Mandatory (Ind AS 7)	Not mandatory; analytical tool
Classification	Operating, Investing, Financing	Sources and Applications
Method	Direct/Indirect	Single format (sources/applications)
Includes	Only cash transactions	All fund changes (cash + non-cash)
Purpose	Cash management	Fund utilization analysis
Time Horizon	Short-term	Medium to long-term
Adjustments	Non-cash items added back	Non-fund items adjusted
Example Use	Detecting cash crunch despite profits	Assessing funding for expansions

Analysis and Interpretation

• Cash Flow: Positive operating cash indicates healthy operations; negative investing shows growth; financing tracks debt/equity mix. Ratios: OCF/Current Liabilities >1 (good liquidity).
• Fund Flow: Sources > Applications = Surplus funds; vice versa = Deficit. Analyze if operations fund investments.
• Integrated Use: Combine for comprehensive view (e.g., cash flow for immediate liquidity, fund flow for structural changes).

Relevance to Financial Sector and Regulatory Bodies

• PFRDA/NABARD: Cash flows track pension/agri-fund liquidity; fund flow assesses long-term solvency.
• RBI/SEBI: Mandatory for banks/markets; detects mismatches (e.g., NPAs impacting cash).
• Current Affairs Link: Post-2025 amendments, focus on non-cash disclosures in exams (e.g., Budget 2025 impacts on cash flows).

Conclusion

Cash Flow Statement is dynamic for cash tracking, while Fund Flow provides a broader fund perspective. Master preparation and differences for exams; practice with real data (e.g., company annual reports). Revise ratios and amendments for depth.

30 MCQs on Cash Flow Statement and Fund Flow Statement

MCQ 1

Question: What is the primary focus of a Cash Flow Statement?
A) Changes in working capital
B) Inflows and outflows of cash and cash equivalents
C) Profit distribution
D) Asset valuation

Correct Answer: B
Explanation: It reports actual cash movements classified into operating, investing, and financing activities.

MCQ 2

Question: Under Ind AS 7, cash equivalents have a maturity of:
A) Up to 6 months
B) Up to 3 months
C) Up to 1 year
D) No limit

Correct Answer: B
Explanation: Short-term, highly liquid investments convertible to cash with insignificant risk.

MCQ 3

Question: Which method starts with Net Profit for operating cash flows?
A) Direct Method
B) Indirect Method
C) Sources Method
D) Applications Method

Correct Answer: B
Explanation: Indirect adjusts profit for non-cash items and working capital changes.

MCQ 4

Question: Dividends paid are classified under:
A) Operating Activities
B) Investing Activities
C) Financing Activities
D) Non-Cash Activities

Correct Answer: C
Explanation: Relates to equity financing.

MCQ 5

Question: What is added back in indirect method?
A) Increase in receivables
B) Depreciation
C) Profit on sale of assets
D) Decrease in payables

Correct Answer: B
Explanation: Non-cash expense reducing profit but not cash.

MCQ 6

Question: Fund Flow Statement focuses on:
A) Cash only
B) Working capital changes
C) Equity shares
D) Fixed assets

Correct Answer: B
Explanation: Analyzes sources and applications of funds (working capital).

MCQ 7

Question: Which is a source of funds in Fund Flow?
A) Purchase of assets
B) Issue of shares
C) Dividend payment
D) Loan repayment

Correct Answer: B
Explanation: Increases working capital.

MCQ 8

Question: Recent 2025 amendment to Ind AS 7 requires:
A) Elimination of indirect method
B) Enhanced non-cash transaction disclosures
C) Mandatory direct method
D) Exclusion of financing activities

Correct Answer: B
Explanation: Includes reconciliation of financing liabilities.

MCQ 9

Question: In Cash Flow, sale of PPE is:
A) Operating inflow
B) Investing inflow
C) Financing inflow
D) Non-cash

Correct Answer: B
Explanation: Disposal of long-term assets.

MCQ 10

Question: Fund Flow ignores:
A) Long-term funds
B) Specific cash transactions
C) Working capital
D) Profit adjustments

Correct Answer: B
Explanation: Broader focus on funds, not just cash.

MCQ 11

Question: IASB’s May 2025 discussion on IAS 7 excluded:
A) Disaggregation improvements
B) Expanding cash equivalents definition
C) Non-cash info transparency
D) Classification consistency

Correct Answer: B
Explanation: Decided against expansion.

MCQ 12

Question: Increase in current assets in indirect method:
A) Added to profit
B) Deducted from profit
C) Ignored
D) Classified as investing

Correct Answer: B
Explanation: Represents cash tied up.

MCQ 13

Question: Fund Flow is useful for:
A) Short-term liquidity
B) Long-term planning
C) Daily cash management
D) Tax calculations

Correct Answer: B
Explanation: Shows fund utilization for expansions.

MCQ 14

Question: Which statement is mandatory under Ind AS?
A) Fund Flow
B) Cash Flow
C) Both
D) Neither

Correct Answer: B
Explanation: Per Ind AS 7 for applicable entities.

MCQ 15

Question: Supplier Finance Arrangements amendment affects:
A) Cash flow disclosures
B) Fund sources
C) Depreciation
D) Inventory

Correct Answer: A
Explanation: Enhances liquidity risk info in cash flows.

MCQ 16

Question: In Fund Flow, depreciation is:
A) Deducted from sources
B) Added back to profit
C) Ignored completely
D) A cash outflow

Correct Answer: B
Explanation: Non-fund item adjusted in profit calculation.

MCQ 17

Question: Net increase in cash equals:
A) Sources – Applications
B) Operating + Investing + Financing
C) Profit + Depreciation
D) WC change

Correct Answer: B
Explanation: Of cash flows from all categories.

MCQ 18

Question: Which is not a limitation of Fund Flow?
A) Ignores cash specifics
B) Accrual-based
C) Mandatory reporting
D) Overlooks time value

Correct Answer: C
Explanation: It’s not mandatory; voluntary tool.

MCQ 19

Question: Interest paid is usually:
A) Investing
B) Financing
C) Operating
D) Non-cash

Correct Answer: C
Explanation: Core operational cost.

MCQ 20

Question: In 2025 Ind AS amendments effective from:
A) Jan 1, 2025
B) Apr 1, 2025
C) July 1, 2025
D) Dec 31, 2025

Correct Answer: B
Explanation: April 1, 2025 for FY 2025-26.

MCQ 21

Question: Cash Flow helps detect:
A) Over-capitalization
B) Cash crunch despite profits
C) Fund applications
D) Equity changes

Correct Answer: B
Explanation: Reveals accrual-cash gaps.

MCQ 22

Question: Applications of funds include:
A) Operating profits
B) Asset purchases
C) Share issues
D) Asset sales

Correct Answer: B
Explanation: Outflows decreasing funds.

MCQ 23

Question: IASB decided to improve:
A) Redefining categories
B) Cash flow disaggregation
C) Free cash flow definition
D) Direct method only

Correct Answer: B
Explanation: Focus on better info presentation.

MCQ 24

Question: Bank overdrafts are:
A) Always cash equivalents
B) Excluded unless cash management
C) Investing activities
D) Fund sources

Correct Answer: B
Explanation: Per Ind AS 7, if repayable on demand.

MCQ 25

Question: Which ratio uses cash flow?
A) Current ratio
B) Cash Flow Coverage
C) Debt-Equity
D) ROI

Correct Answer: B
Explanation: Assesses debt servicing from cash.

MCQ 26

Question: Fund Flow reconciliation: Sources =
A) Applications + WC increase
B) Applications – WC increase
C) Cash inflows
D) Profit only

Correct Answer: A
Explanation: Balances change in WC.

MCQ 27

Question: Direct method lists:
A) Net profit
B) Gross cash receipts
C) Fund adjustments
D) Non-cash only

Correct Answer: B
Explanation: Details actual cash from customers, etc.

MCQ 28

Question: Non-cash transactions are:
A) Included in cash flow
B) Disclosed separately
C) In fund sources
D) Ignored in both

Correct Answer: B
Explanation: Excluded from cash flow but noted in notes.

MCQ 29

Question: For RBI exams, cash flow is key for:
A) Liquidity management
B) Tax planning
C) HR assessment
D) Marketing

Correct Answer: A
Explanation: Monitors bank cash positions.

MCQ 30

Question: Difference: Time horizon of fund flow is:
A) Short-term
B) Medium to long-term
C) Daily
D) Annual only

Correct Answer: B
Explanation: Focuses on structural fund changes.