How are funds defined? Perhaps the most ambiguous aspect of funds flow statement is understanding what is meant by funds.
Unfortunately there is no general agreement as to precisely how funds should be defined. To a lay man the concept of funds means `cash’. According to a few, `funds’ means `net current monetary assets’ arrived at by considering current assets (cash + marketable securities + short term receivables) minus short term obligations. A third view, which is the most acceptable one, is that concept of funds means `working capital’ and in this lesson the term `funds’ is used in the sense of
Working Capital Concept Of Funds
The excess of an
enterprise’s total current assets over its total current liabilities at some
point of time may be termed as its net current assets or working capital. To
illustrate this, let us assume that on the balance sheet date the total current
assets of an enterprise are rs.3,00,000 and its total current
liabilities are rs.2,00,000. Its working capital on that date will be
rs.3,00,000 – rs.2,00,000 = rs.1,00,000. It follows from the above, that any
increase in total current assets or any decrease in total current liabilities
will result in a change in working capital.