Cash Flow Statement: Uses and Limitations | Accounting

In this article we will discuss about the uses and limitations of cash flow statement.

Uses of Cash Flow Statement:

A Cash Flow Statement is of primary importance to the financial management.

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It is an essential tool of short-term financial analysis. Its main uses are as follows:

1. Cash Flow Statement facilitates to prepare sound financial policies. It also helps to evaluate the current cash position.

2. A projected Cash Flow Statement can be prepared in order to know the future cash position of a concern so as to enable a firm to plan and coordinate its financial operations properly.

3. It helps in taking loan from Banks and other financial institutions. The repayment capacity of the firm can be understood by going through the Cash Flow Statement.

4. It helps the management in taking short-term financial decisions.

5. Cash is the soul and heart of the business. Cash is pivot of all business activities. Everyone is cash minded. The aim of business is to gather cash. Business is a source while cash is the end. Therefore, it is very useful.

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6. The statement explains the causes for poor cash position in spite of substantial profits in a firm by throwing light on various applications of cash made by the firm.

Limitations of Cash Flow Statement:

Cash Flow Statement is a useful tool of financial analysis. However, it suffers from some limitations, which are as follows:

(1) A Cash Flow Statement only reveals the inflow and outflow of cash. The cash balance disclosed by this statement may not depict the true liquid position. There are controversies over a number of items like cheques, stamps, postal orders etc. to be included in cash.

(2) A Cash Flow Statement cannot be equated with the income statement. An income statement takes into account both cash and non-cash items. Hence Cash Fund does not mean net income of the business.

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(3) Working Capital being a wider concept of funds, a funds flow statement presents a more complete picture than cash flow statement.

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