Answer:
Refer below the purpose, uses and limitations of Cash Flow Statement
Explanation:
Purpose:
A Cash flow statement is an important part of the financial statements published by reporting firms as per the International Accounting Standard (IAS) 7. A Cash flow statement summarizes the movement of cash from opening balance to closing balance of the financial year. It has three main parts, i.e.
1) Cash flow from operations (It comprise of Cash inflows and outflows from operating activities of the organization whereas non-cash items are removed)
2) Cash flow from investments (It comprise of Cash inflows and outflows from investing activities including assets purchased and sold)
3) Cash flow from finance (It comprise of Cash inflows and outflows from financing activities i.e. loans and shares)
Uses/Benefits:
1) Cash flow information is not easy to manipulate as it just reflects cash inflows and cash outflows, it isn’t affected by accounting policies or accruals.
2) The statement of cash flows provides information about all cash inflows and outflows, from all sources.
3) Cash flow information can provide more detail about the quality of the entity’s revenue, for example, whether customers are (in general) paying their bills.
4) It is easier to understand even to a layman not having technical knowledge of accounting and finance.
Limitations:
1) Management may delay paying suppliers to increase the net cash inflows
2) Management may buy goods using leasing arrangements, to avoid paying cash
3) Cash flows also don’t reflect the earnings of the entity, although a company should be cash positive to trade in the short term, if it is doing this at the expense of sales, or is loss making, it may eventually cease trading.
