LIMITATIONS OF CASH FLOW STATEMENT

The limitations of Cash Flow Statement are:

(1) Non-cash Transactions are not Shown: Cash Flow Statement shows only inflows and outflows of cash.

It does not show non-cash transactions like the purchase of building by issue of shares or debentures

to the vendors or issue of bonus shares.

(2) Not a Substitute for an Income Statement: Income Statement shows net income of the enterprise

based on accrual basis of accounting whereas Cash Flow Statement shows only cash inflows or

outflows which does not represent net profit earned or loss incurred by the enterprise.

(3) Not a Substitute for Balance Sheet: It is not a substitute for Balance Sheet (Position Statement)

because it does not show the financial position (i.e., Equity, Liabilities and Assets).

(4) Historical in Nature: It rearranges available information in the Income statement (Statement of Profit

and Loss) and the Balance Sheet. Thus, it is historical in nature.

(5) Assessment of Liquidity: Liquidity of the enterprise cannot be determined from Cash Flow Statement

alone because it depends on other factors also like current assets and current liabilities. Cash and

Cash Equivalents is one of the components of current assets.

(6) Accuracy of cash Flow Statement: It is prepared from the financial statements. If financial

statements are prepared incorrectly, Cash Flow Statement will also be incorrect.

Submitted October 06, 2020 at 12:03AM by mansicocedu https://ift.tt/3jyyQ0U