Accounting standards require companies to prepare and report financial statements. Usually, these are part of a company’s annual reports. For most companies, it includes the balance sheet, the income statement, and the statement of cash flows. In accounting, these are the mandatory financial statements that every company must prepare and report.
Sometimes, companies may also prepare and report additional statements, although they are not mandatory. Companies do so to enhance the quality of financial information reported to stakeholders. One such report is the statement of sources and uses of funds.
What is the Statement of Sources and Uses of Funds?
The statement of sources and uses of funds provides a detailed breakdown of a company’s cash inflows and outflows during a specific period. However, it is not the same as the cash flow statement. This statement shows how the company obtained its funds and used them for different purposes. As the name suggests, this statement focuses on two areas for funds, sources, and uses.
The statement of sources and uses of funds provides stakeholders with an understanding of how a company generates and uses its cash. It can help assess the company’s financial health and ability to fund future operations or investments. Similarly, it can help identify trends in the company’s cash flow over time and provide insights into its strategy and priorities.
How does the Statement of Sources and Uses of Funds work?
The statement of sources and uses of funds contains two sections. For most companies, the latter part includes the uses of funds in more detail. This section gets broken down into the three categories of operating, investing, and financing activities. For example, a company may use its funds to purchase new equipment, pay off debt, or pay dividends to shareholders. The statement of sources and uses of funds reports these as an outflow.
The sources of funds section also includes three categories, operating activities, investing activities, and financing activities. The definition for each area is the same as that in a cash flow statement. In this section, companies report the sources of funds and how they acquired them. Unlike the cash flow statement, this statement takes a direct approach to reporting these activities.
What is the difference between the Statement of Sources and Uses of Funds and the Statement of Cash Flows?
The primary difference between the statement of sources and uses of funds and the statement of cash flows is the requirement. The former is an optional report that companies may prepare to enhance the quality of financial information presented to stakeholders. On the other hand, the cash flow statement is a mandatory financial statement under accounting standards.
The statement of sources and uses of funds also provides a more detailed breakdown of cash inflows and outflows. On the other hand, the cash flow statement provides a high-level summary of these areas. Similarly, the statement of sources and uses of funds shows information on a company’s cash flow trends, financial health, and priorities. In contrast, the cash flow statement helps stakeholders assess whether the company can generate cash in the future.
Conclusion
The statement of sources and uses of funds is a non-mandatory financial statement. It includes two sections, as the name suggests. Firstly, the sources of funds section show where the company gets its cash. On the other hand, the uses of funds section reports on items that result in fund outflows. This statement is similar to the cash flow statement but has some differences, as listed above.
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