Concept Of "Funds" In Funds Flow Statement

The term "funds" has more than one meaning. In its narrow sense,the term funds is used to mean cash, at most people think that funds and cash are the same thing. In funds flow statement, however cash is not used as a basis,because it concentrates only on changes in a single asset, cash.Instead,the term funds is used in the broader sense of working capital,as it focuses on changes in broader category of working capital.Therefore the term funds is used to mean working capital in the funds flow statement.However, there are two concepts of working capital, ie. gross concept and net concept. The gross concept of working capital means the firm's total investment in its current assets.In its net concept,working capital is the difference between firm's current assets and current liabilities,such that:

Net Working Capital = Current Assets - Current Liabilities


In other word, the net working capital is the excess of current assets over current liabilities. In funds flow statement, the term funds is used to mean net working capital,as it is closely related to the operating cycle of the business.

Related Topics
Concept Of "Flow" In Funds Flow Statement
Concept Of "Statement" In Funds Flow Statement
Preparation Of Funds Flow Statement
Specimen Of Funds Flow Statement

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