9 Limitations of cash flow statement

What is Cash Flow Statement

A cash flow statement is an accounting statement that summarizes a company’s cash inflows and outflows over a specified period of time. It helps investors and analysts understand a company’s liquidity and financial health by showing how much cash is generated and used. Cash from operating activities, investing activities, and financing activities are included in the statement.

Limitations of Cash Flow Statement

Lack of clarity

Cash flow statements are often difficult to interpret because of their complex structure which can be confusing for users who are not familiar with the accounting system.

Not Suitable for Judging Liquidity

Cash flow statements provide investors with an overview of a company’s current cash position, but do not always provide an accurate picture of future cash flows. They do not provide information on a company’s overall financial health, such as its liquidity position or its financial leverage.It’s major limitations of cash flow statement

Ignores Non-Cash Transactions

Cash flow statements do not include non-cash transactions, capital expenditures, long-term debt repayments, dividends, and other non-operating cash flows and those related to investments, dividends, and capital expenditures.

Since the cash flow statement does not consider depreciation and other non-cash expenses, it may not give an accurate picture of a company’s true profitability. company’s investment activities or its ability to generate revenue from non-cash activities.

Fails to Present Net Income

Since a cash flow statement does not take non-cash items into account, net income cannot be determined for a period by looking at a cash flow statement. It can be used to supplement income statements

Uses Historical Data

This statement is prepared from the profit and loss statement and balance sheet so it is a historical statement and can not justify the company’s future performance or its current financial position.

Not a Substitute of Profit and Loss Statement

A cash flow statement is not a substitute for a profit and loss statement because it does not show the profit earned or loss incurred by the organisation during the accounting period.

Not a Substitute of Balance Sheet

It is not a substitute for a balance sheet because it does not show the financial position of the company.

Cash Equivalents Not Included

Cash equivalents are not included in the cash flow statement, which limits the ability of users to gain a full understanding of a company’s liquidity and solvency.

Cash flow statements do not provide information about the market value of a company’s assets. It does not provide information about future cash flows.

Subject To Manipulation

Since cash flow statements are prepared using accounting estimates as per the balance sheet, they may be subject to manipulation by management or auditors.