Concept Of "Flow" In Funds Flow Statement

The term "flow" means change or movement of funds in terms of net working capital.It means inflow or increase and outflow of decrease of fund, ie. net working capital, as a result of certain financial transactions that have taken place in the firm during the specific period.All financial transactions finally affect the balance sheet, but they all do not affect the net working capital of the firm.There are certain class of transactions which cause an increase of funds, while the other cause a decrease of funds in the firm.Therefore,identifying changes in net working capital requires an understanding of the effects of the financial transactions on net working capital.The financial transactions which increase current assets or decrease current liabilities with corresponding decrease in fixed assets or increase in long-term liabilities and capital create inflow or increase in funds or net working capital.On other hand, the transaction which decrease current assets or increase current liabilities with corresponding increase in fixed assets or decrease in long -term liabilities and capital cause outflow or decrease in funds or net working capital.The types of transactions other than these do not affect net working capital and hence do not cause flow of funds in and out of the firm.

The following types of transactions cause change(increase or decrease) of funds.
1.Transactions involving current liabilities and non-current liabilities.
2.Transactions involving current liabilities and non-current assets.
3.Transactions involving current assets and non-current assets.
4.Transactions involving current assets and non-current liabilities and owner's equity.
5.Transactions involving non-operating receipts and non-operating loss.