Limitations of Cash Flow Statement - Management Duniya

Limitations of Cash Flow Statement

Though the Cash Flow Statement is a very useful tool of financial analysis, it has its limitations which must be kept in mind at the time of its use. These limitations are :

(i)           Non-cash Transaction are ignored : The Cash Flow Statement shows only inflows and outflows of cash. It does not show non-cash transactions like the purchase of buildings by the issue of shares or debentures to the vendors or issue of bonus shares.

(ii)         Not a substitute for an Income Statement :  An income statement shows both cash and non-cash items. The income statement shows the net income of the firm whereas the Cash Flow Statement shows only the net cash inflows or outflows which do not represent the net profits or losses of the enterprise.

(iii)       Historical in Nature :  It rearranges the existing information available in the income statement and the balance sheet. It will become more useful if it is accompanied by the projected Cash Flow Statement.

(iv)       Ignorance: – It ignores basic accounting concept, i.e., accrual concept.

Tags: analysis, Cash, financial, financial analysis, flow, income, limitations, Statement
By: Management Duniya