Q:

What is the difference between cash flow and fund flow?

A:

Quick Answer

A cash flow statement illustrates the change in the position of cash and cash equivalents. A fund flow statement depicts the change in the working capital position of a firm between two balance sheet dates, which includes changes in components of liabilities and assets that include cash.

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Full Answer

Since 1988, the cash flow statement has been required by the Financial Accounting Standards Board under the Generally Accepted Accounting Principles. Prior to that, the fund flow statement was required to be prepared by accountants. The cash flow statement is prepared on the cash basis of accounting whereas the fund flow statement is prepared on the accrual basis of accounting.

A cash flow statement is not concerned with the change in working capital of a firm as all changes in the assets and liabilities are summarized in the statement. However, the fund flow statement is dependent upon the use of separate statements of changes in the net working capital.

The cash flow statement is an effective tool for short-term financial analysis of a firm whereas the fund flow statement serves as a valuable tool for long-term financial analysis. The cash flow determines the cash-generating capacity of a firm while the fund flow determines the fund-generating capacity.

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