Friday, August 15, 2014

Management Accounting - Differences

Distinguish between:
(a) Funds flow statement and Balance sheet
(b) Funds flow statement and cash flow statement
(c) Funds flow statement and Income statement
(d) Cash Flow Statement and Cash Budget

(a) Difference between Funds flow statement and Balance sheet:
(i) Balance sheet is a statement showing the financial position of the concern on a particular date. It shows all assets and liabilities whether current or fixed, tangible or intangible etc., while Funds Flow Statement shows the changes in current assets an current liabilities during a particular period of time.
(ii) Balance Sheet shows the total financial position on a particular date and its utility is very limited for the management. On the other hand, Funds Flow Statement is a comparative statement of assets and liabilities and depicts the changes in working capital during the period of two Balance sheets
(iii) Funds Flow Statement is an analysis and control device for the management. It is a modern technique of knowing the inflows and outflows of funds during a particular period. Balance Sheet represents the balance of various assets and liabilities and does not present analysis of any kind.
(iv) There are two views of the financial position of the firm-long term and short-term. Short-term financial position means the solvency of the firm in the near future while on the other hand, long-term financial position means future financial structure of the firm. Both are inter-relate but there is a differences in their analysis. The short-term view of the financial position of the firm cannot be had from the Balance Sheet.

(b) Difference between Funds Flow Statement and Cash Flow Statement
Basis of Difference
Funds Flow Statement
Cash Flow Statement
Basis of Analysis
Funds flow statement is based on broader concept i.e. working capital.
Cash flow statement is based on narrow concept i.e. cash, which is only one of the elements of working capital.
Objective
The object funds flow statement is to disclose the magnitude, direction and causes of changes in working capital.
The object of cash flow is to disclose the magnitude, direction and causes of changes in cash and cash equivalents.
Source
Funds flow statement tells about the various sources from where the funds generated with various uses to which they are put.
Cash flow statement starts with the opening balance of cash and reaches to the closing balance of cash by proceeding through sources and uses.
Usefulness
Funds flow statement is more useful in assessing the long-term financial position.
Cash flow statement is more useful in assessing the short-term financial position of the business.
Schedule of Changes in Working Capital
In funds flow statement changes in current assets and current liabilities are shown through the schedule of changes in working capital.
In cash flow statement changes in current assets and current liabilities are shown in the cash flow statement.
Causes
Funds flow statement shows the causes of changes in net working capital.
Cash flow statement shows the causes of changes in cash.
Principal of Accounting
Funds flow statement is based on the accrual basis of accounting.
In cash flow statement, data are obtained on accrual basis which are converted into cash basis.
Compulsion
There is no prescribed form for preparation of Funds flow statement.
Cash flow statement is compulsory to be prepared in prescribed proforma as given in AS – 3.
Relationship
Funds flow statement can be prepared from the cash flow statement under indirect method.
But a cash flow statement cannot be prepared from funds flow statement.
Financial Health
Sound fund position does not necessarily mean sound cash position.
But sound cash position is always followed by sound fund position.


(c) Difference between Income Statement and Funds Flow Statement
Basis
Income Statement
Funds Flow Statement
Meaning
Income statement is a summary of total income and total expenses and losses of a particular period.
Funds flow statement is the statement of changes in financial position.
Objectives
Income statement is prepared to ascertain the profit earn or loss suffered by a firm.
Funds Flow Statement is prepared to identify how the profit has been utilized.
Preparation
Income statement is prepared on the basis of nominal accounts.
Funds flow statement is prepared on the basis of balance sheet.
Measurement
Income statement is helpful in measuring the profitability of a firm.
Funds flow statement is helpful in determining the net changes in working capital.
Period
It is usually prepared after six months or a year.
It is usually prepared every month.
Matching
This matches the cost of goods sold with the revenue in order to know the profit or loss.
This statement matches the funds raised with funds applied without making any distinction between capital and revenue items.
Scope
It presents the result of all financial transactions of the business during a specified period.
It presents information only relating to working capital and thus its scope is limited.
Reliability
It is not very reliable as items shown in profit or loss account can be easily manipulated by the management.
It is more reliable as items shown in this statement cannot be easily manipulated by the management.


(d) Difference between Cash flow statement and Cash Budget:
Basis
Cash Flow Statement
Cash Budget
Objective
It is prepared to explain to management the sources of cash and its uses during a particular period of time.
It is prepared to show the probable cash position at a planned operation.
Coverage
It summarises effect of specific cash transactions into three categories operating, investing and financing activities of an enterprise during a period in prescribed format.
It can also be coordinated in relation to total working capital, sales, investments and debts.
Meaning
It means inflows and outflows of cash and cash equivalents.
It is estimated receipts and payments of cash over a period of time.
Technique of analysis
It is a technique of past analysis.
It is a technique of future financial forecasting.
Period
It covers a period of one year.
It is broken into monthly, weekly segments.
Emphasis of source
It does not emphasise on a particular source and use.
It emphasises on the financial pattern to meet seasonal or temporary cash needs.


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