In this article we take a look at the benefits and limitations of Cash Flow Statements.
Cash flow statements – benefits
Cash flow information provided in the statement of cash flows can be beneficial, for example:
- Cash flow information is harder to manipulate as it just reflects cash in and cash out, it isn’t affected by accounting policies or accruals.
- The statement of cash flows provides information about all cash inflows and outflows, from all sources.
- Cash flow information can provide more detail about the quality of the entity’s revenue, for example, whether customers are (in general) paying their bills.
- Cash accounting methods used in the statement of cash flows can be easier for non-accountants to understand.
Cash flow statements – limitations
We’ve looked at all the benefits of a statement of cash flows, but there are limitations and drawbacks.
One of the major drawbacks is how information can be manipulated in the statement of cash flows:
- Management can delay paying suppliers to increase the net cash inflows
- Management can buy goods using leasing arrangements, to avoid paying cash
Cash flows also don’t reflect the earnings of the entity, although a company should be cash positive to trade in the short term, if it is doing this at the expense of sales, or is lossmaking, it may eventually cease trading.
None of the individual financial statements on their own show a full view of the entity’s performance.
Users of the financial statements should consider all parts of the financial statements together, and also other non-financial information about the company to assess its performance.