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Massive Advantages 5 Disadvantages of Cash Flow Statement

Massive Advantages | 5 Disadvantages of Cash Flow Statement

Posted on 04/08/202301/08/2023 By Study Notes Expert No Comments on Massive Advantages | 5 Disadvantages of Cash Flow Statement

Cash flow statements shows the inflows and outflows of cash from the company. In the following sections, you will know the advantages and disadvantages of cash flow statement.

Table of Contents

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  • Advantages of Cash Flow Statement
  • Disadvantages of Cash Flow Statement
    • 1) Non-Cash Transactions are Overlooked
    • 2) Not a Substitute for an Income Statement
    • 3) Limited Use
    • 4) Historical in Nature
    • 5) Ignoring the Accrual Concept

Advantages of Cash Flow Statement

Preparation and analysis of cash go with the flow statement have the following benefits:

1) It allows measurement of the enterprise’s capacity to meet its fixed costs.
2) It is useful in bringing to the forefront the business enterprise’s reputation concerning its Liquidity and Solvency throughout dangerous conditions.
3) It is beneficial in assessing the adjustments in ‘Cash Position’ among ‘Profit & Loss Account’ and ‘Balance Sheet’ gadgets of two consecutive accounting durations.

4) Disclosures made through the ‘Cash Flow Statement‘ permits the management of a commercial enterprise agency to provoke preventive measures in financially tough conditions.
5) Identification of Discretionary Cash Flows from business transactions becomes feasible via Cash Flow Analysis.
6) It enables listing out the ‘Potential Financial Flows,’ which can be positioned to use during crises.
7) Cash Flow Statement is famous for the data concerning the availability of cash. Such facts could be very useful in identifying the quantum of “Dividend’ to be dispensed to the shareholders or, in extreme instances, whether or not to bypass a dividend fee altogether.

Disadvantages of Cash Flow Statement

The cash drift statement is poor in positive respects, some of which might be as follows:

1) Non-Cash Transactions are Overlooked

The full attention of the Cash Flow Statement is completely on the ‘Inflows and Outflows of cash. Non-Cash Transactions like buy of homes through issuing shares/debentures to the companies or the difficulty of bonus shares are out of its purview.

2) Not a Substitute for an Income Statement

An Income Statement of an enterprise corporation covers each Cash and Non-Cash gadget and reveals the Net Income. Cash Flow Statement, on the other hand, takes into attention only ‘Cash Flows’ and, as such, can show the simplest ‘Net Cash Flows’ (inflows or outflows). It can not expose the ‘Net Profit/Loss of the corporation.

3) Limited Use

Cash Flow Statement has very restricted use in isolation. While its miles follow using different ‘Financial Statements’ like ‘Balance Sheet’ and ‘Profit & Loss Account,’ it affords a few meaningful and beneficial effects.

4) Historical in Nature

Preparation of Cash Flow Statement includes rearranging different Financial Statements, viz. ‘Balance Sheet’ and ‘Profit & Loss Account”, which include beyond statistics and are historical. It might have been extra useful and prospective when followed with a Projected Cash Flow Statement’.

5) Ignoring the Accrual Concept

Accrual Concept, one of the fundamental accounting concepts, must be addressed simultaneously as making ready a coin go with the flow announcement.

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