(a) It is common practice for companies to produce a Statement of Source and Application of Funds (Flow of Funds Statement) to be sent to shareholders, together with the profit and loss account and balance sheet.

How does such a statement help shareholders to analyse the company’s financial performance?

(b) In the preparation of the Statement of Source and Application of Funds, and adjustment is made for items which appear in the accounts, but do not involve the movement of funds.

(1): Give an example of such an item.

(2) Explain briefly why this adjustment is made.