Distinguish Between the Three Concepts of Funds Which Can Be

Question

Examlex · Accepted Answer

The Answer is Historical and projected statements of cash flows are prepared as a matter of course formanagement to use in monitoring the cash position so that surplus cash can be invested and cashshortages can be avoided or financed.It can be argued that,because cash flow is the life blood ofany business,financial statement users would be as interested in cash flows as management.Working capital was a widely used interpretation of funds,particularly in the US.Working capitalis usually measured as current assets less current liabilities.An increase in working capital (sourceof funds)occurs when there is an increase in total current assets without a corresponding increasein total current liabilities (e.g.an issue of shares for cash)or a decrease in total current liabilitieswithout a corresponding decrease in current assets (e.g.refinancing a short-term loan with a long termloan).A decrease in working capital (application of funds)occurs in the opposite circumstances.In total,the difference between sources and uses of working capital will be equal to the change inworking capital between successive statements of financial position.The total resources concept of funds is based on an interpretation of the statement of financial position as a statement that shows the sources of an entity's resources and how those resources have been used.The obligations side of the statement of financial position is a summaryof the financial resources that have been entrusted to the entity by lenders and shareholders.Theassets side of the statement of financial position shows how these financial resources have beenused.Some financial resources have been used to acquire assets,some have been used to providecredit and some remain as cash.This interpretation of the statement of financial position isconsistent with a stewardship notion of accounting.The statement shows how management hasused the financial resources entrusted to it by outsiders.Any transaction that increases liabilitiesor equity is a source of funds.Conversely,any transaction that reduces liabilities or equity is a useof funds.Any transaction that increases assets is a use of funds,and any transaction that reducesassets is a source of funds that are now 'free' for some new use.Since all transactions affect thestatement of financial position,a total resources funds statement summarises all transactions.

Distinguish Between the Three Concepts of Funds Which Can Be

Definitions: