The article examines flow of funds approach to accounting theory. It is quite common now for a firm to publish a statement showing the flow of funds during its financial year. These statements are known by such various titles as "source and use of funds," or "financial inflow and outflow." All attempt to show the finance which has become available and the uses to which it has been put. The presentation of the third statement, in addition to the statements of profit and financial position, has developed in an attempt to provide meaningful and intelligible information for investors, analysts and other interested persons. If the flow of funds statement is a useful summary of a firm's activities, it is possible that this statement is a useful starting point for two other purposes. On the one hand, it may be possible to use the statement for introducing accounting to first-year students, whether accounting or non-accounting majors. On the other hand, it may be helpful to use the flow of funds statement as a focal point in discussions about accounting concepts.

To relate cost and sales we must value inventory changes at marginal cost. The accounting equation, using this concept, is based on two estimates: (a) volume of inventory at successive points of time (b) marginal cost of the physical inventory change. Errors in these two estimates are relatively more important as the period is shortened. We can eliminate the necessity of making these estimates by introducing purchases and production into the regression calculations as independent variables. For certain purposes it is desirable to convert the equation into a function expressing cost as dependent on sales (or any one of the independent variables). This requires coefficients of physical relationship among the independent variables, purchases, production, and sales. These coefficients may be estimated directly, from long term averages, or from first differences derived from data on input-output quantities in successive periods.