Dementia is highly comorbid with gait disturbance, and both conditions negatively impact the ability of elderly people to conduct daily living activities. The ambulatory status of older adults with dementia may cause variable functional disability, which is crucial for the progression of dementia. The present study investigated the association between ambulatory status with functional disability in elderly people and dementia by using the World Health Organization Disability Assessment Schedule 2.0 (WHODAS 2.0). In total, 34,040 older adults with mild-to-advanced dementia were analyzed and categorized according to their ambulatory status into three groups: Nonambulatory, assisted ambulatory, and ambulatory. In general, poor ambulatory status was associated with both greater severity of dementia and functional disability. The study participants were further segregated according to their ages and dementia severity levels, which demonstrated that the WHODAS 2.0 domains of functioning for getting along, life activities, and participation (domains 4, 5–1, and 6) were all associated with ambulatory status. In addition, nonambulatory status was significantly associated with institution residency among older adults with dementia. In conclusion, the present study clearly demonstrated the role of ambulatory status in functional disability in older adults with dementia, and the association persisted among older adults of different ages and severities of dementia. This finding indicates the importance of maintaining walking ability in the management of dementia in older adults.