The four objectives of a fund flow statement are: to measure cash inflows and outflows, to determine the liquidity position of a company, to identify sources and uses of funds, and to analyze the overall financial condition. The first objective is usually measured as net income (net operating cash flows) plus dividends from investments in securities.
Objectives of Fund Flow statement
A fund flow statement is a financial statement that shows how money flows into and out of a company. A fund flow statement has four key objectives: liquidity, solvency, profitability, and cash flow.
Liquidity
Liquidity measures how easily a company can pay its debts as they come due. It is calculated by dividing its current assets by its current liabilities. A ratio of less than one means the company does not have enough liquid assets to cover its short-term debt.
Solvency
Solvency measures whether or not a company can meet its long-term debt obligations. It is calculated by dividing its total liabilities by its total assets. A ratio of more than one means the company has more assets than disadvantages and is therefore solvent.
Profitability
Profitability measures how efficiently a company is using its assets to generate profits. It is calculated by dividing its net income by its total assets, and a ratio of less than one means the company is not profitable enough to cover its costs.
Cash flow
Cash flow measures how much cash a company has available to reinvest in the business or pay creditors. It is calculated by subtracting a company's cash from its operating activities from its investing activities and financing activities. A positive number means the company has more money coming in than going out, while a negative number means the opposite.
Conclusion
These four objectives are essential for investors and lenders alike because they provide an overview of a company's financial health and indicate whether or not it can meet its obligations over the long term.
By understanding these objectives, investors can better assess a company's risk and make more informed investment decisions.