Salient features of Cash Flow Statement:-

1. To ascertain cash requirements: The Cash Flow Statement helps in ascertaining the requirements of Cash in the enterprise from time to time on different areas of expenditure like operating, investing and financing so as to ensure that required cash is available at the time of requirement.
2. To analyse different sources of cash inflows: With the help of Cash Flow Statement, an enterprise can ascertain it’s different sources of cash inflows and analyse which source requires more attention so as to increase the revenue or cash inflows.

3. To ensure arrangement of funds in time: Cash Flow Statement informs the managers about how much of funds will be required at which point of time and so to maintain the liquidity in the enterprise to meet its cash commitments on time.

 

4. To avail favourable investment opportunities: Where there are surplus cash balances in the enterprise and no immediate cash payment commitments, the enterprise can utilise these surplus funds in short term securities or investments thereby making most profitable use of the surplus funds.

 

5. Useful in Comparison: With the analysis of cash flow statements, an enterprise can compare the up’s and down’s in cash flows at different points of time as well as the actual cash flow during a said period with the budgeted one.

 

6. Analysing reasons of current cash position: If the present cash position of the enterprise is much higher or much lower than the budgeted position, an analysis can be made of the reasons of such position can be made and corrective actions van be taken in a timely manner.

 

7. Helpful in dividend decisions: With the help of Cash Flow analysis, an organisation may decide whether dividend should be paid in cash or in other manner. For eg; if the organisation have enough liquidity, it may pay dividends in cash, otherwise it may issue Bonus Shares to the Shareholders and thereby utilise its cash resources for other important purposes.

 

Limitations of Cash flow Statement:

 

1. Not a substitute of Income Statement: Irrespective of its relevance for various analysis and in decision making, it is not a substitute for income statement as it does not reflects the profits or losses of the enterprise.

 

2. Historical in Nature: Cash Flow Statement is prepared after the end of the reporting period. Any loopholes in the operations of the business related to Cash Management can be known only after it has already taken place. Rectification is not possible, only it can guide the enterprise’s future course of action.

 

3. Violation of Basic Accounting Principle: Fundamental Accounting Principal of Accrual Basis of Accounting is not followed in case of calculating operating results of the organisation.
4. Inaccurate assumptions: Budgeted Cash Flows are predicted on the basis of certain assumptions which may not work in the actual situations. This may lead to liquidity crisis if the variations are adversely significant to the enterprise.
5. Non-cash items are ignored: Cash Flow Statements ignores non-cash incomes and expenses which are relevant to the decision-making in the organisation. For eg; Abnormal Profits or Losses or profit/loss on disposal of old assets of the entity.
6. Not a sole criterial of liquidity position: Cash Flow Statement is not the only criteria to assess the liquidity position of the enterprise. Current Assets & Current Liabilities are also important factors in this segment. For eg; an entity may not have enough liquidity in terms of cash flow statement, but their Trade Receivables are good and can promptly be converted into Cash. Like Bills Receivable can be discounted with Bank or can be endorsed in favour of a Trade Payable thereby settling the liability by endorsement of a Bill rather than paying in Cash.