Difference between Income Statement And Funds Flow Statement

Income statement and funds flow statement can be distinguished as below:

1. Meaning

Income Statement: Income statement is a summary of total income and total expenses and losses of a particular period.

Funds Flow Statement: Funds flow statement is the statement of changes in financial position.

2. Objective

Income Statement: Income statement is prepared to ascertain the profit earn or loss suffered by a firm.

Funds Flow Statement: Funds Flow Statement is prepared to identify how the profit has been utilized.

3. Preparation

Income Statement: Income statement is prepared on the basis of nominal accounts.

Funds Flow Statement: Funds flow statement is prepared on the basis of balance sheet.

4. Measurement

Income Statement: Income statement is helpful in measuring the profitability of a firm.

Funds Flow Statement: Funds flow statement is helpful in determining the net changes in working capital.

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Difference Between Balance Sheet And Funds Flow Statement

The main differences between balance sheet and fund flow statement are as below:

1. Meaning

Balance Sheet: Balance sheet is a statement of assets, liabilities and capital.

Funds Flow Statement: Funds flow statement is a statement if changes in assets, liabilities and capital accounts.

2. Objective

Balance Sheet: Balance sheet is prepared to ascertain the financial position of a firm.

Funds Flow Statement: It is prepared to ascertain the sources and application of funds.

3. Preparation

Balance Sheet: It is prepared with the help of trial balance.

Funds Flow Statement: It is prepared with the help of balance sheets of two subsequent dates.

4. Information

Balance Sheet: It provides static view of financial affairs.

Funds Flow Statement: It provides the changes in assets, liabilities and capital accounts.

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Funds Flow Statement

After ascertaining the increase or decrease in net working capital and funds or loss from operation, the next step is to prepare the funds flow statement. The purpose of preparing the funds flow statement is to know about the funds obtained and used by the firms. The funds flow statement has two sides. On the left hand side, the sources of funds are shown and on the right hand side, the uses or applications of funds are shown.

Sources..................................... Amt...........Applications...................................Amt

Funds from operation .............xxx........Increase in working capital...............xxx

Decrease in working capital....xxx.........Loss from operation...........................xxx

Issue of share............................xxx.........Redemption of preference share......xxx

Issue of debenture...................xxx..........Redemption of debenture..................xxx

Increase in long term liabilitie.xxx.........Purchase of fixed assets.....................xxx

Sales of fixed assets..................xxx..........Investment made................................xxx

Sale of long term investment...xxx..........Repayment of long term liabilities... xxx

non trading receipt.....................xxx..........Non trading payment.........................xxx

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Concept Of Statement Of Funds From Operations And Its Preparation

After preparing the schedule of changes in net working capital, the second step is to determine the amount of funds(loss) from business operations. It refers to the funds or loss, which is generated or suffered in the business as a result of its regular operations during the period. The funds fro operation is an important source of fund, while loss from operation is one of the important applications of funds. The funds or loss from operation is determined by adjusting the firm's net income in a statement called the statement of funds from operations. In this statement, the items such as non-operating incomes and non-cash expenses are adjusted while determining the amount of funds(loss) from operations.

Non-cash expenses such as depreciation and amortization of intangible assets do not result in actual cash outflow. Non-operating expenses are those which are not treated as regular expenses of the business. These expenses matter while ascertaining the business income, but are irrelevant in determining the funds(loss) from operations. Therefore non-operating incomes should be deducted from and non-operating and non-cash expenses should be added back to the business income shown by the income statement.
Non-operating and non-cash expenses
* Depreciation for the year
* Amortization of goodwill,copyright,patent,trademark,preliminary expenses
* Discount on issue of share and debenture written off
* Loss on sale of fixed assets or investment
* Loss of revaluation of fixed assets
* Premium on redemption of debentures and preference share.

Incomes and gains which are not earned from the normal business operations are called non-operating incomes. These incomes are included while ascertaining the business income, but are excluded while determining the funds(loss)from operations. The following are the examples of non-operating incomes.
*Gain on sale of fixed assets or investment
* gain on revaluation of fixed assets
* Discount on redemption of debentures and preference share
* Compensation received
* Interest received
* Refund of tax
* Transfer fees received
* Appreciation on fixed assets

Preparation Of Statement Of Funds From Operation

Funds from operations can be determined by using one of the two following methods.
1.Add Back Method
Under this method,net profit is taken as the base. All the non-operating and non-cash expenses are added to net profit and non-operating incomes are deducted.

Funds from operations = Net profit+Non-operating and non-cash expenses-Non operating Incomes.

2.Profit And Loss Adjustment Account Method
Funds from operations can also be determined by preparing an account called profit and loss adjustment account begins with opening balance of profit on its credit side and closing balance on the debit side. Instead of opening and closing balance of profit and loss account, only the amount of net profit for the year can also be brought down to the debit side of this account. Then the items of non-operating expenses and non-cash expenses are adjusted to the debit side and the items of non-operating incomes are adjusted to the credit side to determine the amount of funds(loss) from operations.

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Preparation Of Statement Or Schedule Of Changes In Net Working Capital

In the preparation of funds flow statement, the first step is to find out the net amount of increase or decrease of working capital, as increase in net working capital is a use of funds and decrease in net working capital is a source. Since net working capital is excess of current assets over current liabilities, the increase or decrease in the net working capital can be found out by comparing the current assets and current liabilities contained in the balance sheets of two following dates.For this purpose, a statement is prepared which is called statement or schedule of changes in net working capital. This statement helps to identify the change in position of the working capital. While preparing the statement of changes in working capital,the following points are taken into account.

* Increase in current assets , increase in net working capital
* Decrease in current assets , decrease in net working capital
* Increase in current liabilities , decrease in net working capital
* Decrease in current liabilities, increase in net working capital

The statement or schedule of changes in net working capital can be prepared by using one of the following forms.

1. Using only current account
The statement or schedule of changes in net working capital can be prepared by using only current account,viz. account of current assets and current liabilities. While preparing the statement, the current assets and current liabilities of the previous year are compared with those of the current year and changes(increase or decrease) therein are determined. If the total of increase is more than that of decrease, there is an increase in net working capital, or vice verse.

2. Using both current and non-current accounts
The statement or schedule of changes in net working capital can also be prepared by using both current as well as non-current accounts.Current account is the account of current assets and current liabilities and non-current account of non-current assets and non-current liabilities and owner's equity. Increase in an item of current assets or decrease in an item of current liabilities from previous year to this year is debited, while increase in an item of current liabilities or decrease in an item of current assets is credited to current account. On other hand, increase in an item of non-current assets or decrease in an item of non-current liabilities from the previous year to this year is debited, while increase in an item of non-current liabilities and owner's equity and decrease in an item of non-current assets is credited to non-current account.

The preparation of statement of changes in networking capital under this method is advantageous as compared to the previous method as it is easy to prepare funds flow statement there from.

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Preparation Of Funds Flow Statement

Funds flow statement is prepared mainly with the help of balance sheets of any two successive dates. Funds flow statement is prepared by comparing the balance sheets of the two dates and using the income statement of the year for which the funds flow statement is being prepared.The following steps are taken for the preparation of the funds flow statement.

Step -1:
Preparation of statement or schedule of changes in Net Working Capital
.
*Using only one current account
*Using both current and non-current accounts

Step -2
Statement of funds from operation

* Add Back Method
* Profit and loss Adjustment Account Method

Step -3
Funds Flow Statement

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Concept of "Statement" In Funds Flow Statement

A statement is a written record which presents some kind of information and facts about some events in a systematic manner.The funds flow statement is,therefore, a written record of the source of funds in terms of net working capital and its application on different heads during a particular period of time. It is also called statement of sources and application of funds or how funds come and where funds gone statement.The funds flow statement is prepared by using one of the following forms.

1. Horizontal Form
The funds flow statement can be prepared by using the horizontal form. In this form,sources of funds are shown on the left-hand side and uses or applications of funds on the right-hand side of the statement.

2. Vertical form

The funds flow statement can be prepared by using the vertical form. In this form,sources of funds are shown on the upside and uses or applications of funds on the down-side of the statement.

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