Question

Write any four limitations of the cash flow statement.

Hint:

While cash flow statements provide valuable insights into the company’s liquidity, it’s important to use other financial statements like the income statement and balance sheet for a complete financial analysis.

Answer 1

Step 1: Understanding Limitations of Cash Flow Statement.
Although the cash flow statement is useful in evaluating the liquidity position of a company, it has certain limitations:
Step 2: Four Limitations of Cash Flow Statement.
1. Excludes Non-Cash Transactions: The cash flow statement does not include non-cash transactions such as revaluation of assets, stock appreciation, or depreciation.
2. Ignores Profitability: While cash flow statements reflect cash inflows and outflows, they do not provide a clear picture of the company's profitability. A company could have positive cash flow but may not be profitable.
3. No Information on Future Cash Flow: The statement does not give any information about future cash flows, making it difficult to predict the future financial position of the company.
4. Not Useful for Long-Term Planning: The cash flow statement mainly focuses on short-term liquidity and does not provide sufficient information for long-term financial planning or investment decisions.
Step 3: Conclusion.
Although the cash flow statement is helpful in assessing the liquidity of a company, it is not a comprehensive tool for evaluating the overall financial health or performance of a business.