Question

explain the limitations of cash flow statement ?​

Answer 1

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..

Answer 2

Answer:

The limitations of cash flow statement are:

1. Not suitable for judging liquidity
2. Window dressing
3. Ignores non-cash transactions
4. Ignores accrual concept
5. Not a substitute for the income statement
6. Historical nature

Explanation:

• A cash flow statement is a statement showing inflows (receipts) and outflows of cash (payments)  during a particular period.
• In other words, it is a summary of sources and applications of cash during a particular span of time.

Limitations of Cash flow statements are as follows:

1. Not suitable for judging the liquidity   :

• It does not present the true picture of the liquidity of a firm because the liquidity does not depend on cash alone.
• Liquidity also depends upon the assets which can be easily converted into cash form.
• Removal of these assets results in not suitable for showing true and fair picture of liquidity of a concern.

2. Window dressing:

• The possibility of window dressing is higher in case of cash flow statement.
• The cash balance can be easily manoeuvered by postponing purchases and other payment's.

3. Ignores non-cash transactions :

• It ignores non cash transaction such as purchase of fixed assets , issuing shares and debentures , conversion of shares into share, issue of bonus share etc.

4. Ignores accrual concept :

• It is prepared on cash basis hence ignores one of the basic concepts of accounting.

5. No substitute for an income statement:

• Cash flow statement is not a substitute of income statement which takes into consideration both cash and non cash items.

6. Historical

• It is prepared on comparative statement balance sheet of past years. Hence it is historical in nature.

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