Fund Flow Analysis:
This is the analysis of flow of fund from current asset to fixed asset or current asset to long term liabilities or vice- versa. First of all, we create fund flow statement and then study its cause and consequence deeply and try to find numerous important facts and information that can be employed in business. It can too solve problems below.A. Why are total current assets falling after getting high volume of total profit?
Ans. Fund flow statement is prepared by taking two period balance sheets and when we study it then we can find that it might possible that we are employing net profit for purchasing fixed assets. Statement of modifying in working capital can too demonstrate total decrease in working capital.
B. Why did corporation not issued high dividend, even company had earned big profit in last year?
Ans. You know that dividend is given subsequent to seeing the level of fund from operation not total profit. When corporation has made fund flow statement, then fund from operations will become the source. The Financial analyst must check this amount and recommend board of directors what amount will be appropriate according to the revenue performance of company. Therefore it is not essential that high gain level will give high dividend to shareholders.
C. How did company utilize net profit?
Ans. Fund flow statement gives clear picture of sources and utilization of fund and when we take some adjustments of non operating items, then we can recognize the amount of fund from operation and it is compared with fund employed. Therefore, it might possible that we had utilized it for purchasing fixed assets or refund of loan.
D. What are the major sources of redemption of loan?
Ans. Loan is the major fixed liability of business and when it has increased from preceding period, then when we study sources of fund from fund flow statement, then we can guess that whether sources are strong to reimburse all the amount of loan or not. Assume, if we are taking other loan to reimburse the amount of payable loan then it is not good source however when we have received big money from operation as source for repayment then it can be stated that it is excellent source of fund.
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