Uses of Cash Flow Statement - Management Duniya

Uses of Cash Flow Statement

(i)           Short-Term Planning : The Cash Flow Statement gives information regarding sources and application of cash and cash equivalents for a specific period so that it becomes easier to plan investments, operating and financing needs of an enterprise.

(ii)         The Cash Flow helps understand Liquidity and Solvency : Solvency is the ability of the business to meet its current liabilities. Quarterly or monthly Cash Flow Statements help ascertain liquidity in a better way. Financial institutions, like banks prefer the Cash Flow Statement to analyse liquidity.

(iii)       Efficient Cash Management :  The Cash Flow Statement provides information relating to surplus or deficit of cash. An enterprise, therefore, can decide about the short-term investments of the surplus and can arrange the short-term credit in case of deficit.

(iv)       Comparative Study : A comparison of the Cash Flows for the previous year with the budgeted figures of the same year will indicate as to what extent the cash resources of the business were generated and applied according to the plan. It is, therefore, useful for the management to prepare cash budgets.

(v)         Reasons for Cash Position : The Cash Flow Statement explains the reasons for lower and higher cash balances with the enterprise. Sometimes, a lower cash balance is found in spite of higher profits or a higher cash balance is found in spite of lower profits. Reasons for such situations can be analysed with the help of the Cash Flow Statement. Sometimes in spite of high profits gone? Answers to such questions can be found from the Cash Flow Statement.

(vi)       Test for the Management Decisions : It is a general rule that fixed assets are purchased from the funds raised from long-term sources, and the best way to repay the long-term debt is out of profits. The Cash Flow Statement shows clearly whether the cash inflows from operations have been used for the purchase of fixed assets or whether these assets have been purchased from cash inflows from long-term debts. Similarly, it also explains whether the debentures have been redeemed out of profits or not. Thus, the Cash Flow Statement fan be used to test the credibility of the management decisions.

Tags: Cash, Cash Flow, decisions, flow, Liquidity, Management, Planning, Statement
By: Management Duniya