Write the advantages of cash flow statement



Write the advantages of cash flow statement

A cash flow statement is a type of accounting report that shows the flow of cash in and out of a business.


It shows the inflows and outflows of money and the current liquidity position of the organization in terms of income statement and balance sheet. Even if a company is profitable, it may not be able to pay current debts, income tax and dividends due to lack of cash. Or there may be an abundance of liquidity despite operating at a loss. The cash flow statement is the only method of determining cash inflows, outflows or ability to repay current liabilities.


Explanation of Cash Flow Statement:

Accounts and management branch officers have to ensure payment of wages and current liabilities. It is known from the cash flow statement whether the company will be able to meet these debts in the near future.


Prospective lenders and lenders use these statements to determine whether the firm has sufficient liquidity.


Potential investors can also refer to the cash flow statement to know whether their investment is safe or not.


Whether the organization can pay the salaries of the officers and employees on time or not, it is clearly understood from this statement.


Cash flow statement shows only inflows and outflows of cash and cash equivalents and excludes non-cash transactions. It helps to get an idea of the organization's liquidity and current assets and current liabilities.


Some other purposes of cash flow statement are:

To give an idea about the company's liquidity, solvency and future liquid flow.

To give an idea of what changes may occur in the assets of the organization in the future.

To determine the performance and capacity of the organization by comparing the liquidity situation of different organizations.

Forecasting the timing of future cash outflows.


The importance of cash flow statement has greatly increased after gaining international recognition. Cash flow statement has many benefits. Its five advantages are mentioned below:


1. Cash Flow Analysis: A thorough analysis of the cash position is possible through the cash flow statement. If the expected cash surplus is found through cash analysis, then it can be invested in cashable security.


2. Anticipation of future cash: Without a proper understanding of future cash receipts and disbursements, it is not possible to formulate and implement any plan related to financial operations. Through the cash flow statement one can get an idea about the future cash receipts and disbursements of the organization.


3. Taking corrective action: If any difference in cash surplus or other differences is observed comparing the historical cash flow statement of the organization and the proposed cash flow statement, the organization can take corrective action in time.


4. Actual Picture of Liquidity: Every organization wants to maintain a desirable level of liquidity. Since the cash flow statement shows the true picture of the liquidity position of the organization, the desired liquidity for the future can be determined by considering the liquidity position of the organization.


5. Supply of information: The cash flow statement is supplied to various parties in the transaction by way of written information. Information through which the potential creditor investor can get a clear idea about the particular business

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