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Liquidity refers to resources currently available with the firm. It is

reflected by the funds or cash flows rather than just the stock of

current assets and liabilities.

Funds flow is a change in a firms net current assets. Funds or cash

flows occur due to changes in items in the balance sheet and profit &

loss statement. Thus liquidity analysis involves measurement of

changes in assets, liabilities and equity.

2

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Current Assets means all the assets that can beconverted into cash within one working year Eg of CAare Cash Bills Receivables Debtors Inventory Prepaid Expenses

Current liabilities means which the firm has to paywithin one working year Creditors

Bills Payable Proposed Dividend Outstanding Expenses

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Total Resource Basis

Working capital Basis

On the basis of Cash

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Sources of Funds Uses of fundsIncrease in Capital or Liabilities Decrease or payment of

Liabilities & capital

Sale or decrease in Assets Increase or purchase of assets

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(Rs 000)

19X1 19X2 ChangeASSETS

Cash 54 135 81

Debtors 6,750 8,235 1,485

Stock (inventory) 10,125 22,680 12,555

Total current assets 16,929 31,050 14,121

Fixed assets (net) 2,970 6,075 3,105

Other assets 945 1,890 945Total Assets 20,844 39,015 18,171

LIABILITIES & NET WORTH

Bank borrowing 3,510 8,664 5,154

Creditors 2,835 6,615 3,780

Provision for taxes 270 972 702

Accrued expenses 810 2,700 1,890

Total current liabilities 7,425 18.951 11,526Long-tenn debt 1,944 1,404 -540

Total liabilities 9,369 20,355 10,986

Paid-up share capital 8.37 8,370

Reserves and surplus 3,105 10,290 7,185

Total Liabilities 20,844 39,015 18,171

TABLE 1. ABC Co.: Balance Sheet Changes,

March 31,19Xl-March 31, 19X2

Changes in the financial position of the firm

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hange in shortterm element hange in long termelementChange in shortterm element No Flow of fund Flow of fund

Change in long termelement Flow of fund No flow of fund

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It has three major parts

Statement of changes in Working Capital

Fund From Operations

Fund Flow Statement: Statement showing sources &

uses of funds

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Funds flow from operations+ PAT (loss)

+ Depreciation/ amortization

+ Non-Operating expenses (e. g. Loss from thesale of fixed assets, interest paid..)

Non-operating incomes (e.g. Gain from the saleof fixed assets)

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Sources of funds or cash flows: funds from operations

sale of fixed assets

issue of share capital

borrowings

Uses of funds are: losses

purchase of fixed assets

repayment of borrowings payment of dividends

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Analysis of Financial Position Evaluation of Firms Financing

An instrument for Allocation of Resources

A tool of Communication to outside World Future Guide

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