Importance of cash Flow Statement with Limitations Forecast Format

Best 12 Importance of cash Flow Statement with Limitations Forecast Format

 Importance of Cash Flow Statement:-

Cash Flow Statement is very significant for financial planning. This statement is quite useful for preparing future plan and per-determination of financial position. It helps in the preparation of cash budget. Cash Flow Statement is very significant in the following manner.

1.        Since a cash flow statement is based on the cash basis of accounting, it is very useful in the evaluation of cash position of a firm.  

2.        Cash flow analysis is more useful and appropriate than funds flow analysis for short - term financial analysis as in a very short period, it is cash which is more relevant than the - working capital for forecasting the ability of the firm to meet its immediate obligations.  

3.        A Series of intra-firm and inter-firm cash flow statements reveals whether the firm's liquidity position is improving or deteriorating over a period of time and in comparison to other inns over a given period of time. 

4.        By preparing projected cash flow statement, a firm can come to know as to how much cash will be generated into the firm and how much cash will be needed to make various payments and hence the firm can well plan to arrange for the future requirement of cash.
 

5.A comparison of the historical and projected cash flow statements can be made so as to find the variations and deficiency or otherwise in the performance so as to enable the firm to take immediate and effective action.

6. Cash Flow Statement provides information of all activities ossified under operating, investing and financing activities. Thus, Cash Flow Statement has great usefulness. 

7. Cash Flow Statement helps in planning the repayment of loans, replacement of fixed assets and other similar long-term planning of cash. It is also significant for capital budgeting decisions.

8. It better 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.

9. Cash Flow Statements prepared according to As-3 (Revised) is more suitable for making comparisons than the funds flow statement as there is no standard format for the same.

10. With the help of Cash Flow Statement liquidity of the business can be measured. Liquidity means capacity of a business to repay its short-term liabilities in time.  
 

11. Cash Flow Statements is more significant for preparing a future plan. With the help of CFS, management is able to know from which sources cash will be received and how much cash needed   to   be   accumulated   from   other   sources.   Thus, coordination among different activities can be established. 

12. Cash Flow Statements the causes of changes in cash equivalents position between the two Balance sheets.

Uses of Cash Flow Statement:-

Ans. Cash Flow Statement is a useful tool of historical analysis is it helps to answer many questions such as: -

1. What is the liquidity position of the firm?

2. Why has the cash balance decreased although the net profit for the period has gone up? 

3. Why has the cash balance increases even though there has been a net loss for the period? -.

4. How much of the firm's working capital needs were met by the funds generated from current operations?

 5. Did the firm use external sources of finance to meet its needs of funds?

6. Could the firm pay its long-term debt as per the schedule?

7. Did the firm pay dividends to its shareholders or not? If not, was it due to shortage of funds?

8. If the external financing was used, what ratio of debt and equity was maintained?

9. What were the significant investments and financing activities of the firm which did not involve working capital?

The limitations of Cash Flow Statement?

Despite a number of uses, Cash Flow Statement suffers from the flowing limitations: -

1. Ignore Accounting Concept of Accrual Basis: As Cash Flow Statement is based on cash basis of accounting, it ignores the basic accounting concept of accrual basis.

2. Ignores Non-cash Transactions: Cash Flow Statement ignores the non-cash transactions. In other words, it does not consider those transactions which do not affect the cash e.g., issue of shares against the purchase of fixed assets, conversion of debentures into equity shares etc.

3. Not a Substitute for Income Statement: It is not a substitute for Income Statement. Net cash flow disclosed by CFS does not necessarily mean net income of the business, because net income is determined by taking into account both cash and non-cash items. 

4. Not a Substitute of Funds Flow Statement: Cash Flow Statement cannot replace Funds, Flow Statement 'cash' used to signify funds is a narrow concept.

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