They generally result from the transactions and other events that are used to determine net profit or loss. These are the principal revenue generating activities of the enterprise. Therefore, it does not represent the real liquidity position.Ĭash flows are classified and presented into operating activities (either using the 'direct' or 'indirect' method), investing activities or financing activities, with the latter two categories generally presented on a gross basis. It only helps to know what amount of obligation can be met. Statement of cash flows does not assess liquidity or solvency position of the firm in practice as it presents cash position only on a particular date. Does not Properly Assess Liquidity position. A firm having less capital investment shall have less cash flow than the firm which has more capital investment resulting in higher cash flows. Therefore, comparisons with other companies are not possible. Statement of cash flows does not measure the efficiency of firm. The functions which are performed by an income statement cannot be done by cash flow statement. However, it can be used as supplement to income statement. It does not help to assess profitability as it neither considers cost nor revenues. Statement of cash flows fails to present the net income of a firm as it ignores non-cash items which are considered by income Statement. It enables users to develop models to assess and compare the present value of the future cash flows of different enterprises Cash flow information is useful in assessing the ability of the enterprise to generate cash and cash equivalents. Statement of cash flows represents the ins and outs of cash meaning the flows of cash on the basis of which future estimate can be made. Management can take appropriate actions if any variance is found. The management can evaluate the performances regarding cash by comparing actual cash with projected cash flow statements. Management can prepare estimates about various inflows of cash and outflows of cash so that it becomes helpful to take future actions. It helps the top-level management to coordinate financial operations properly. The financial planning and analysis is done with the help of statement of cash flows. Assist in Planning, Budgeting and Controlling.If there are excesses of funds, these can be used for growth of the business. In case of shortage required funds can be raised through external sources. Statement of cash flows helps in knowing the liquidity position of the company. ‘Cash’ comprises of cash in hand and demand deposits with banks, and ‘Cash equivalents’ means short-term highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value. Statement of cash flows shows inflows and outflows of cash and cash equivalents from various activities of an enterprise during a particular period. IAS 7 Statement of Cash Flows requires an entity to present a statement of cash flows as an integral part of its primary financial statements. The objective of IAS 7 is to require the presentation of information about the historical changes in cash and cash equivalents of an entity by means of a statement of cash flows.
0 Comments
Leave a Reply. |