The Statement Of Changes In The Financial Situation
The Statement of Changes in the Financial Situation is one of the most important for the Management of an organization; Today, this State is mandatory in most countries of the world.
This state is also known as the State of Sources and Uses, or State of Sources and Application of Funds, which is of interest to Management, because it shows them where their funds come from and how they apply them.
A derivation of this financial statement is the so-called cash flow, which determines the sources and uses of funds, which are made in cash. This derivation becomes more effective every day given the need for Financial Management to control Cash flows, given that in the financial services market there are attractive packages to use surplus money for a short time, in order to give it profitability.
When comparing the Statement of changes in financial position and the Statement of cash flow or cash, we find that they are very similar - The cash budget occurs prior to the accounting period in question, and refers to cash transactions, while the Statement of Changes in the Financial Position occurs at the end of the accounting period and analyzes all changes in assets and liabilities.
In summary, the Statement of Changes in the Financial Situation is another Financial Statement, of as much importance as the Statement of Income and Expenses and the Balance Sheet, which makes its preparation and presentation necessary.
A Statement of Changes in Financial Position has two well-defined parts: sources of funds, and applications of funds. The most important sources of funds are the resources generated by:
- The normal operations of the company. Those of the sale of non-current assets. Long-term loans. Issuance of stocks and bonds.
The most important funds applications are the expenditures generated by:
- Payment of dividends Return or payment of long-term debt Acquisition of non-current assets Inventories
Preparation of the Statement of Changes in the Financial Situation.
There are three basic methods for preparing the Statement of Changes in the Financial Position, namely:
- The one based on working capital The one based on cash (Cash Flow Statement) The method of comparing the balance at the beginning of the accounting period with the balance at the end of the accounting period.
Whichever method is used, the final result of the Statement of Changes in Financial Position must be the same.
Steps to prepare the statement of changes in the financial situation.
An analysis of funds consists of four separate steps, although only the third is the one that constitutes the essence of the entire analysis, and it is the one that generates some work. The steps are the following:
- Calculation of change in net working capital, Determination of which non-working capital accounts have changed. Analysis of non-working capital accounts. Preparation of Statement of Changes in Financial Position.
In financial matters, one can speak of three types of decisions; the optimal, the suboptimal and the intuitive.
- OPTIMAL: An optimal decision is considered as the best solution to the specified conditions of the problem to be solved. It is the mode of action or course of action that maximizes the achievement of a certain set of objectives. Therefore, a decision is optimal or it is not.
The specified set of conditions, that is, the demand or need for resources, implies a solution, and this is optimal if it maximizes achievement of the objectives. SUBOPTIMAS: A suboptimal decision is not necessarily an inferior decision or a bad decision. Suboptimal refers to an optimal decision made at a lower level of the organization. In other words, the subordinate decision maker chooses a course of action that maximizes the achievement of its objectives set by the Management. A suboptimal decision, although optimizing with respect to the section's objectives, may not lead to an optimal decision regarding the achievement of the organization's objectives. For example, the head of a section may be instructed to minimize production costs with respect to some defined production requirement.The optimal decision made in this section may be inconsistent in relation to the suboptimal ones made by the decision makers of other sections, hence the final effect may be a general set of decisions, which is not optimal for the Company as a whole, or that is, it does not maximize the achievement of the organization's objectives. INTUITIVES: Intuitive decisions are the choices made without knowing if they are optimal or not. Some of these decisions are made so lightly that it seems as if they were made blindly. Such decisions are made at all levels of management and their importance is determined by the fact that an overwhelming majority of decisions fall into this category. The explanation of the intuitive way of making decisions revolves around many factors. Some of them are:
- Insufficient time is allocated to obtaining optimal decisions. The objectives are not clearly defined or the conditions of the problem to be solved are not well structured. The complexity of the problem prevents an optimal solution; that is, that an optimal decision cannot be deduced. Lack of information. In some cases it is argued that the cost of obtaining an optimal solution is greater than the cost of the error linked to an intuitive decision. This fifth point implies that under such conditions the intuitive process is optimal.
Many of the most important problems encountered in business administration are too complex to support optimal solutions. But this does not mean that the quality of intuitive decisions cannot and should not be improved. One of the main purposes of studying how to make financial decisions is to develop instruments, analytical means and ideas to improve the quality of intuitive decisions.
