Limitations of Cash Flow Statements

Limitations of Cash Flow Statements-

Cash flow statement is used as a tool of financial statement analysis. Even though, cash flow statement suffers from some limitations. Such limitations re listed below.

1. Cash flow statement shows only cash inflow and cash outflow. But, the cash balance disclosed by the statement cannot reveals the true liquid position of the business.

2. Net Cash Flow disclosed by Cash Flow Statement does not necessarily mean net income of the business because net income is determined by taking into account both cash and non-cash items.

3. It does not give complete picture of the financial position of the business concern.

4. The preparation of cash flow statement is only postmortem analysis. There is no projection of cash in future in this method.

5. It is not a substitute of Income Statement.

6. The accuracy of cash flow statement is based on the balance sheet. If balance sheet is wrong, the cash flow statement is also wrong.

7. It is not prepared on the basic accounting concept of accrual basis. Hence, the accuracy of cash flow statement is questionable.

8. It is not suitable for judging the profitability of a firm as non-cash items are not included in the calculation of cash flow from operating activities.

Related Post

Share the Knowledge: