How to interpret flow of funds accounts for Capital Flow Analysis How To Interpret Flow of Funds Accounts

Explaining Capital Flows

There are two levels in the process of using flow of funds accounts for Capital Flow Analysis.

The second level is more difficult than the first.

In this lesson, we deal with the easier task of explaining flows by reading the flow tables.

Sector and Instrument Tables

In Lesson 23, we explained how to start flow of funds analysis by going to the red-green instrument table for the security market that we are studying.

The instrument table tells us which sectors (households, corporate issuers, mutual funds, etc.) have been net buyers or sellers of that class of security and how their asset allocation patterns have changed over time.

How to read flow of funds tablesSectors in the left column of an instrument table have corresponding sector tables, showing sources and uses of funds for those sectors.

For most of the players listed in the left column of the instrument table, there is a corresponding yellow-blue sector table.

Reading Sector Tables

The sector tables are divided horizontally into three parts.

One line of the NIPA section is marked with a yellow background to indicate a source of income or savings for the sector.

Sometimes the NIPA section has only one line and this is coded yellow to indicate a source of funds.

The theory used to compile data in the NIPA section is often incompatible with accounting concepts.

Some lines in the NIPA section are not of interest in Capital Flow Analysis.

Sources of Funds in a Sector Table

In the sector tables, sources of funds are shown against a yellow background and usually consist of:

  1. current income from the NIPA tables;
  2. new borrowed money or capital infusions; or
  3. the sale of assets.

Uses of Funds in a Sector Table

Uses of funds in a sector table are shown against a blue background and consist of:

  1. purchase of assets;
  2. reduction of debt or capital accounts; or
  3. losses or dis-savings in the NIPA accounts.

Connecting Instrument and Sector Tables

The instrument tables show which sectors have been buying or selling a particular type of security.

Sector tables show how players finance the net purchases that are shown in the instrument table and where these players apply proceeds of sales.

The coding conventions on this site facilitate interpretation:

By comparing flows on the instrument table with flow on the related sector tables, it is possible to see how players have been financing their purchases of securities and what they have done with the proceeds of sales.

This is the obvious and easiest way to discover reasons why players are buying and selling securities.

For example, if in a particular period we note that Households have been selling equities and mutual funds while buying bonds and money market funds, we might conclude that individual investors have grown weary of the stock market and are seeking safer, more conservative investments.

Before proceeding, check your progress:

Self-Test

A flow of funds instrument table has:
Choice 1 sectors listed in the left column.
Choice 2 blue-yellow color coding.
Choice 3 instruments listed in the left column.
Choice 4 red-green color coding.
Two of the three horizontal sections of a sector table are:
Choice 1 NIPA data and purchasers.
Choice 2 Liabilities and NIPA data.
Choice 3 Issuers and financial assets.
Choice 4 Debits and credits.
Sector uses of funds include:
Choice 1 Purchase of assets.
Choice 2 Sale of assets.
Choice 3 Capital infusions.
Choice 4 Reduction of debt.

Investment Tutorial: Capital Flow Analysis How to interpret flow of funds accounts : continued >

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