The limitations of the income statement and the balance sheet highlight the importance of the funds-flow statement. This is because in the first two statements, one does not know from where the firm has received funds and where it has spent these funds. Therefore, a situation may arise when a firm has earned net profits but does not have money in the bank for meeting various claims. The reasons for this would not be evident either from its income statement or from its balance sheet. It is only a funds-flow statement that can reveal the reality of the situation.


Funds mean working capital, that represents the difference between current assets and current liabilities. All flows of funds pass through working capital. ...

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