Doesn't the Statement of Changes in Working Capital help in analysing funds flow

The statement of changes in working capital (fund) is prepared by taking the current account balances from the balance sheet. It is prepared for the period for which funds flow is being analysed which generally is the accounting period.

It provides us the information relating to change in the values of the various current account balances by comparing the balance as on the first day (opening balance) with the balance on the last day (closing balance) of that period.

The aggregate value of the changes in the current accounts would give us the net change in working capital (fund) over the period.

Funds flow analysis not possible from the Statement of changes in Working Capital

From the statement of changes in working capital, we can only say that there is a change in fund (working capital) on account of a change in so and so current account balance.

The statement only provides the information relating to the magnitude of the fund before and after the flow along with the magnitude of change in the fund.

Funds flow analysis involves analysing the flow i.e. finding the reasons for the flow. This involves dealing with the actual transactions that have caused the flow.

The statement of changes in working capital does not provide any information relating to the actual transactions that have caused that change.

For analysing Funds Flow we need additional information

Cross transactions are the reason for funds flow.

Of all the accounting transactions that have brought about a change in the current accounts, only cross transactions would be relevant in analysing funds flow.

To analyse funds flow using the information relevant to current accounts, we need consider all the accounting transactions that have affected current accounts and from among them we need to identify the cross transactions which have also brought about a change in the fund (working capital).

Minimizing the effort

Cross transaction involves a current account and a non-current account. Cross transactions are all that we need to be able to analyse funds flow.

The magnitude of accounting transactions involving non-current accounts are generally far lesser compared to the accounting transactions involving current accounts.

Therefore, in analysing funds flow we try to identify the cross transactions using the changes in non-current accounts.

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