What are the limitations of cash flow statement?

A summary of all transactions that directly change the amount of cash appears in the cash flow statement. Although it helps management in making financial or other important decisions, it has several disadvantages or limitations.

Some of the disadvantages of this narrative are discussed below:

1. While the inflows and outflows of cash disclosed in the cash flow statement are important in making various decisions, it fails to highlight changes in non-cash uses of assets.

2. The short-term debt repayment ability of an organization that we verify through this statement may not be completely accurate. This is because assets that are easily or shortly convertible are not taken into account.

3. While the cash flow statement analyzes the short-term financial position of an organization, it is not very helpful in long-term financial analysis.

4. Current capital and financial assets information is not directly and completely available from this statement, which is very important for an organization.

5. In cash flow statement, cash flow is generally analyzed by dividing it into three activities as per IAS-7.

But this classification is quite troublesome and time consuming.

6. Through this statement, we cannot know how much cash a company can invest in fixed assets and long-term finance.

7. Cash funds are part of working capital and when cash funds improve, funds also improve.

But the reverse is not true.

8. Although we use the word “cash” often, it is difficult to explain or give a precise definition.

Although checks, stamps, postal orders, savings certificates etc. are included as cash in a broad sense, there is often considerable disagreement on this issue.

Despite the above disadvantages or limitations, cash flow statement is very important in a business organization.