Merits and Demerits of Cash Flow Statement
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Merits and Demerits of Cash Flow Statement

Merits and demerits of Cash Flow Statement A cash flow statement is useful in short-term planning. A business firm requires sufficient cash to meet its various obligations in the near future. An analysis of different sources and applications of cash will enable the management to make reliable estimates about inflows and outflows of cash. On the basis of such estimates, management can plan out for investment of surplus cash or for meeting any cash deficit.

Merits and demerits of Cash Flow Statement

A cash flow statement is useful in short-term planning. A business firm requires sufficient cash to meet its various obligations in the near future. An analysis of different sources and applications of cash will enable the management to make reliable estimates about inflows and outflows of cash. On the basis of such estimates, management can plan out for investment of surplus cash or for meeting any cash deficit.

The main advantages of a cash flow statement are as follows.

(i) Cash flow statement helps in efficient cash management. It is useful in evaluating financial policies and cash position of the business. Cash is the basis of all financial operations. Therefore, a projected cash flow statement will enable the management to plan and control the financial operations properly. The management can know how much cash is needed from which source it will be derived, and how much cash can be generated internally and 1 much could be obtained from outside.

(ii) Cash flow statement helps in internal financial management. It is useful in formulation of financial plans, e.g., possibility of repayment of long-term loans dividend policy replacement of plant and machinery, etc.

(iii) Cash flow statement discloses the movements of cash and reasons thereof. It tells the reasons for less cash balance in spite of heavy operating profits or for heavy cash balance in spite of low profits.

(iv) Cash flow statement discloses success or failure of cash planning. Actual cash flow statement and projected cash flow statement can be compared to detect deficiency, if any, in cash management. Remedial measures can then be taken to remove the deficiency.

Cash flow statement suffers from the following boundaries.

(i) Cash flow statement does not disclose net income from operations. Therefore, it cannot be a substitute for income statement,

(ii) The cash balance as shown by the cash flow statement may not represent the real liquidity position of the business because it can be easily influenced by postponing the purchases and other payments,

(iii) Cash flow statement cannot replace the funds flow statement. Each of the two has a separate function to perform.

In spite of these limitations, cash flow statement is a useful supplementary tool for management. It discloses the volume as well as the speed at which the cash flows in the different segments of the business. This is helpful to management in knowing the amount of capital tied up in a particular segment of the business. The cash flow analysis together with the ratio analysis serves as a barometer in measuring the profitability and financial position of business.

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Cash Flow Statement vs. Fund Flow Statement

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