adv and dis adv of cash flow statement

7/17/2019 adv and dis adv of cash flow statement

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4.3 WHAT IS CASH FLOW STATEMENT?

Cash Flow Statementis a summarized statementshowing sources of Cash Inflows and

applications of cash outflows of an enterprise during a particular period of time (generally, a

year). A Cash Flow Statementis prepared on the basis of the published data as disclosed by

the Financial Statementof two different financial years. It summarizes all Cash Flows

between two financial years. It is an essential tool for managerial decisionma!ing. Cash

Flow Statementreports the management "et Cash Flow (i.e., cash inflow less cash outflow or

#ice #ersa) from each acti#ity of the enterprise as well as of the o#erall business of the

enterprise.

4.7 ADVANTAGES OF CASH FLOW STATEMENT

All enterprises en$oy lots of benefits through the Cash Flow Statement, as the latter is ha#ingthe following ad#antages%

&. It pro#ides ade'uate information as regards to the

inflows and outflows of cash resources to and from

the enterprise.

. It pro#ides separate information as regards to the

inflows and outflows of cash from the differentacti#ities of the enterprise.

. It e#aluates the le#el of efficiency of the

management of the enterprise as regards to the uses

of its cash resources.

*. It discloses the li'uidity and sol#ency position ofthe enterprise.

+. It helps the management a lot for future cash

planning of the enterprise.

. It pro#ides the necessary information to the

management, so that the situation of e-cessi#esurplus cash or deficiency of cash can be a#oided.



. It shows the actual cash position a#ailable with the

company between the two balance sheet dates

which funds flow and profit and loss account are

unable to show and therefore it is important toma!e a cash flow report if you want to !now about

the li'uidity position of the company.

/. It helps the company in ma!ing accurate

pro$ections regarding the future li'uidity position

of the company and hence arrange for any shortfall

in money by ma!ing arrangements in ad#ance and

if there is e-cess than it can help the company in

earning e-tra return out if idle funds.

0. It acts li!e a filter and is used by many analyst and

in#estors to $udge whether company has prepared

the financial statements properly or not because if

there is any discrepancy in the cash position as

shown by balance sheet with cash flow

statementthan it means that statements are

incorrect.

4.8 LIMITATIONS OF CASH FLOW STATEMENT

In spite of the immense usefulness of the Cash Flow Statement, it has its own limitations.

1hey are as follows%

&. Cash Flow Statementshows only the inflows and outflows of cash, and thus, it does

not ta!e into consideration the noncash transactions of the enterprise that had ta!en

place during the same period.

. As it considers only the inflows and outflows of cash, the "et Cash Flow of a certain

period does not necessarily mean the "et 2rofit of the business, as "et 2rofit is

ascertained considering both cash as well as noncash transactions. 1hus, there may



be a huge difference between the "et Cash Flow and the "et 2rofit for the same

period.

. As it discloses the "et Cash Flow, and not the "et 2rofit for a certain period, it is not

a substitute of the profit and loss account (2rofit 3 4oss A5c) or Income statement.

*. Since it shows only cash position, it is not possible to arri#e at actual profit and loss of

the company by $ust loo!ing at this statementalone.

+. In isolation this is of no use and it re'uires other financial statements li!e balance

sheet, profit and loss etc6, and therefore limiting its use

4.6 USES OF CASH FLOW STATEMENT

Cash Flow Statementis a #ery useful tool to the management. It has the following uses%

&. Predictio o! F"t"re C#$% F&o'$% 7n the basis of Cash Flow Statement, an

enterprise can predict the flows of cash from and to the organization for the near

future period.

. S%ort(Ter) Fi#ci#& P&#i*% 8ith the help of the information as pro#ided

through the Cash Flow Statement, an enterprise can chal! out its future shortterm

financial planning as regards to the in#estment of its cash resources.

. Li+"idit, #d So&-ec, Po$itio% It indicates to the management about the li'uidity

and sol#ency position of the enterprise, so that the management can ta!e appropriate

measures if it finds any wea!ness.

*. Di$c&o$"re o! Mo-e)et o! C#$%% It discloses the mo#ement of cash from and to the

enterprise during a particular period, and any de#iation from the budgeted figure can

be identified.

4.5 IMPORTANCE OF CASH FLOW STATEMENT

Cash Flow Statementis issued as an important tool of Financial Statementanalysis to the

management. It helps the management to assess the ability of an enterprise to generate cash

resources from its different activities and the needs of the enterprise to utilize those cash

resources into its different activities. Analysis of sources and application of cash for different

acti#ities of an enterprise enables its management to prepare the reliable cash flow pro$ection

for the future planning. Cash Flow Statementis #ery much useful for a shortterm planning of

an enterprise. As Cash Flow Statementlocates #arious inflows and outflows of cash fordifferent acti#ities of a concern, the management of the concern can easily assess the cash



position of those acti#ities and can also easily identify the stronger and wea!er area of cash

position of the different acti#ities of the concern.

5.4 WHAT IS FUND FLOW STATEMENT?

A Fund Flow Statementis a summarized statementof the movement of

Fund (i.e., or!ing Capital" from different activities of a concern

during an accounting period. It is prepared to locate the various sources of Fund inflows into the business and also to identify the

various purposes of Fund outflows from the business, during two

consecutive #alance Sheet dates. As it is a summarized statementof

Fund inflows and Fund outflows from different acti#ities of an

enterprise during a particular period, the management gets a #i#id

picture of the mo#ement of Fund in between two consecuti#e 9alance

Sheet dates by preparation of a Fund Flow Statement. 7ne side of theFund Flow Statementshows the #arious sources of Fund and the other

side shows the #arious applications of Fund during an accounting

period. A Fund Flow Statementacts as an important tool of Financial

Analysis to the management. 1hus, the management can assess the

mo#ement of Fund from different acti#ities of the business and can

draw up its future planning.

.6 LIMITATIONS OF FUND FLOW STATEMENT

Although a Fund Flow Statementhas more imp:ortance from the #iew point of the

management of a concern, yet it suffers from the following limitations%

&. Fund Flow Statementis not a basic Financial Statement, but is a supplementary

statement. It does not disclose any new fact which is not reflected in the IncomeStatementand the 9alance Sheet.



. It pro#ides a partial financial information to the management.

. It cannot present the continuous changes in the financial position.

*. It does not indicate the structural change of an asset or a liability.

+. It is prepared on the basis of historical data.

. It e-hibits the changes in the Fund position, but does not indicate the changes in the

cash position, which is most important for e#ery business concern.

. Funds flow statement has to be used along with balance sheet and profit and loss

account, it cannot be used alone.

/. . It does not re#eal the cash position of the company, and that is why company has to

prepare cash flow statement in addition to funds flow statement.

0. . Funds flow statement merely rearranges the data which is there in the boo!s of

account and therefore it lac!s originality. In simple words it presents the data in the

financial statements in systematic way and therefore many companies tend to a#oid

preparing funds flow statements.

&:. *. Funds flow statement is basically historic in nature, that is it indicates what

happened in the past and it does not communicate anything about the future, only

estimates can be made based on the past data and therefore it cannot be used the

management for ta!ing decision related to future.

. IMPO/TANCE O/ PU/POSES OF FUND FLOW STATEMENT

Fund Flow Statementacts as an important tool for Financial Analysis and shows the brief

reasons for change in the 8or!ing Capital between two 9alance Sheet dates. It has more

importance from the #iewpoint of the management of a concern. It ser#es the following

purposes%

&. Fund Flow Statemente-plains how the financial position has changed from the

beginning of an accounting period to the end of that period.

. It acts as an important instrument for allocation of resources of a concern. It enables

the concern for ma!ing plans for optimum allocation of resources.

. It answers many intricate financial 'ueries such as reasons for changes in 8or!ing

Capital position, #arious sources of repayment of loans, #arious sources of ac'uiring

capital, sources of Fund from nonoperating acti#ities, applications of Fund towards

#arious nonoperating acti#ities, Fund generation through operating acti#ities and so

on.



Advantages of Funds Flow Statement

Funds flow statement is prepared to show changes in the assets, liabilities and e'uity between

two balance sheet dates, it is also called statement of sources and uses of funds. 4et;s loo! at

some of the ad#antages of preparing funds flow statement <

&. Funds flow statement re#eals the net result of operations done by the company during the

year.

. In addition to the balance sheet, it ser#es as an additional reference for many interested

parties li!e creditors, suppliers, go#ernment etc6 to loo! into financial position of the

company.

. It shows how the funds were raised from #arious sources and also how those funds were

put to use in the business, therefore it is a great tool for management when it wants to !now

about where and from funds were raised and also how those funds got utilized into the business.

*. It re#eals the causes for the changes in liabilities and assets between the two balance sheet

dates therefore pro#iding a detailed analysis of the balance sheet of the company.

+. Funds flow statement helps the management in deciding its future course of plans and also

it acts as a control tool for the management.

Funds flow statement should not be loo!ed alone rather it should be used along with balance

sheet in order $udge the financial position of the company in a better way.

adv and dis adv of cash flow statement

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