Discuss the uses and limitations of cash flow statement

Asked by admin @ 20/08/2021 in Accountancy viewed by 506 People

Explain the limitations of cash flow statement ?

Answered by admin @ 20/08/2021

Answer:

The limitations of cash flow statement are as follows:

Fails to Present Net Profit: Cash flow statement fails to present the net income of a firm for period as it ignores non-cash items which is considered by Profit and Loss Statement. Cash flow statement does not help to assess profitability as it neither considers cost nor revenues. However, it can be used as supplement to income statement.

Not a substitute to Funds Flow Statement or Income Statement: The functions which are performed by funds flow statement or income statement cannot be done by cash flow statement.

Industry Comparison not possible: As cash flow statement does not measure the efficiency of firm, inter comparison with other inter industry is not possible. A firm having less capital investment shall have less cash flow tan the firm which more capital investment resulting in higher cash flows.

Does not Properly Assess Liquidity position: In a practical scenario, cash flow statement does not assess liquidity or solvency position of the firm as it presents cash position only on a particular date. It only helps to know what amount of obligation can be met. In nutshell, it does not represent the real liquidity position.

hope it helps..

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