MCQs On Funds Flow Statement – With Answers & Explanations

The funds flow statement is a vital accounting tool that shows the movement of funds and changes in working capital within a business over two balance sheet dates. This topic is important for board exams, commerce entrance tests, and business decision-making, helping students analyze sources and application of funds for sound financial management.

What is a Funds Flow Statement?

A funds flow statement is a financial document that analyses the movement of funds in an organisation between two dates. It focuses on identifying sources and uses of funds and highlights changes in working capital. This makes it crucial for exams and practical financial analysis.

Key Concepts in Funds Flow Statement

Understanding the funds flow statement involves several accounting concepts essential for business studies. These concepts are regularly covered in school and competitive exams, making them vital for student preparation.

• Funds flow statement is prepared using balance sheets of two time periods.
• It shows both sources and applications of funds during the period.
• The main aim is to track changes in working capital.
• Sources include funds raised or received; applications are where funds are spent or used.
• It is different from the cash flow statement, which tracks only actual cash movement.

MCQs on Funds Flow Statement

Practicing funds flow statement MCQs improves conceptual understanding and prepares students for board, college, and entrance exams. Here are common questions with their answers and explanations.

• Funds flow statement is prepared on the basis of _____.
  a) Profit and loss account of the current year
  b) Balance sheet of previous and current year
  c) Both a and b
  d) None of the above
  Answer: c – Both balance sheets and P&L account provide information needed for funds flow analysis.


• Funds flow statement is also called _____.
  a) Statement of sources and uses of funds
  b) Statement of sources and application of funds
  c) Statement of funds flow
  d) All of the above
  Answer: d – All names refer to the same statement in different contexts.


• Which of these impacts working capital in a funds flow analysis?
  a) Change in inventory
  b) Purchases of fixed assets
  c) Issue of shares
  d) Increase in share capital
  Answer: a – Change in inventory is a current asset and affects working capital directly.


• The term ‘flow of funds’ means _____.
  a) Change in working capital
  b) Change in funds
  c) Both a and b are incorrect
  d) Both a and b are correct
  Answer: d – Flow of funds generally refers to changes in working capital and fund position.


• If total sources of funds are Rs. 2,00,000 and total application of funds are Rs. 2,50,000, the working capital will _____.
  a) Decrease by Rs. 50,000
  b) Increase by Rs. 50,000
  c) Not be affected
  d) None of the above
  Answer: a – More application than sources reduces working capital.

Difference Between Funds Flow and Cash Flow Statement

Though often confused, funds flow and cash flow statements are distinct. Understanding this difference is essential for answering commerce MCQs and for actual business analysis.

Preparation of Funds Flow Statement

To prepare a funds flow statement, you need two consecutive balance sheets and relevant details from the profit and loss account. The process includes:

• Calculate changes in working capital (current assets – current liabilities)
• Identify all sources of funds (e.g., loans raised, assets sold)
• List applications of funds (e.g., purchase of assets, dividends paid)
• Summarise net change in working capital

You can learn the step-by-step process with examples in the DK Goel Solutions Class 12 Accountancy chapter on funds flow statement.

Real-World Significance of Funds Flow Statement

Businesses and financial managers use the funds flow statement to monitor fund allocation and strategic planning. For example, if a company notices a decrease in working capital, it may decide to postpone new investments. This practical use makes it a core area in commerce curricula and business practices.

Where Funds Flow Knowledge Helps Students

Knowing how to analyze a funds flow statement helps students in:

• Scoring higher in school board and university exams
• Solving competitive exam MCQs (like CA, CS, CMA, UPSC Commerce)
• Understanding real-world business financial decisions
• Preparing for case studies and business analysis questions

Quick Tips for Solving Funds Flow Statement MCQs

• Always check if items affect current assets or liabilities.
• Remember: If both increase, working capital may not always increase.
• Non-cash items (like depreciation) do not affect funds flow.
• Read each MCQ carefully—some options may seem similar but differ in concept.
• Practice with structured examples from trusted resources such as Vedantu.

Related Topics for Further Practice

If you want to explore more, visit these important resources at Vedantu:

• Difference Between Cash Flow and Fund Flow
• Working Capital
• Analysis of Financial Statements
• Financial Statements of a Company
• Ratio Analysis
• Final Accounts
• Ledger Accounts

At Vedantu, we make accounting topics like the funds flow statement simple, covering all key exam points and practical examples. This ensures students and business learners build strong core knowledge for exams and future careers.

In summary, the funds flow statement provides a detailed look at the movement of funds and working capital. Mastery of this topic is essential for accounting exams, analyzing business operations, and understanding financial health. Use Vedantu’s resources to deepen your understanding and ace your exams.