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It measures actual inflow and outflow of cash. It does not consider any accruals.
While drafting a cash flow, you start with the opening balance of cash and summarise the receipts and payments and the resultant figure is the closing balance of cash.
It measures the working capital of the company. It is excess of current assets over current liabilities.
Consider depreciation : Though an entry is made in the P&L account, cash does not go out (actually it is a book entry). Therefore, while preparing funds flow statement, you have to add this amount to profit.
Similarly, when you sell a asset, you have to account for profit of loss on sale of an asset. You take into account the book value of the asset and find the difference from sale value and estimate your profit. Therefore, if you had accounted for loss, it is again a book entry only and has to be added back to profits.
In the cash flow, you would have considered the actual cash that had come in on sale of the asset.
Moreover, for working out funds flow, you start from the opening balance of accumulated profits and end with the closing balance.
Another way of working the funds flow through balance sheet is finding the difference between the current assets and current liabilities.
Please get back if you require more clarity.
21st August 2005 From India,