Question

Explain the uses and limitations of a cash flow statement

Answer 1

Cash flow statements are useful in

• Understanding the ability of the business entity to manage their Cash Resources.
• Understanding the efficiency of the organisation in converting their accrued incomes to Cash.
• Understanding the ability of the enterprise to generate cash from Operating Activities.
• Gaining knowledge about investments made/redeemed, acquisition and disposals of assets.
• Understanding the ability of the business to meet their liabilities debt creditors and owners ie dividends paid.

Limitations of Cash flow statement:

• Imformation supplied by the cash flow statement is pertaining to historical performance and not the future.
• May not help in understanding decisions involving significant Non-Cash transactions. Example, exchange of assets, purchase of assets/buisness for exchange of shares, etc
• It is mere rearrangement of accounting information especially Cash Account.
• Financial analysts do not prefer this as tool for financial analysis.
• It is merely a fund flow statement explaining movement of Cash.