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Cash Flow Statement — Accountancy STD 12 Commerce — Question

CBSE BoardEnglish MediumSTD 12 CommerceAccountancyCash Flow Statement4 Marks
Question
What is Cash Flow Statement? Discuss its main uses and limitations.
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Answer

Cash Flow Statement is a statement that shows inflows (receipts) and outflows (payments) of Cash and Cash Equivalents of an enterprise during a specified period of time.
  1. Short-term Planning: Cash Flow Statement gives information about sources and applications of Cash and Cash Equivalents for a specific period. It helps in planning investments and assessing the financial requirements of the enterprise.
  2. Cash Flow Helps in Assessing Liquidity and Solvency: Solvency is the ability of the enterprise to meet its liabilities on time. Cash Flow Statement helps to assess liquidity.
  3. Efficient Cash Management: Cash Flow Statement gives information relating to surplus or deficit of cash. An enterprise, therefore, can decide about the Short-term Investments of the surplus and can arrange the Short-term Credit in case of deficit.
  4. Comparative Study: A comparison of the actual cash flows with the budgeted cash flows of the year shows the extent to which Cash and Cash Equivalents were generated and applied as per the plan.
  5. Reasons for Cash Position: Cash Flow Statement shows the reasons for lower and higher cash balances with the enterprise. Sometimes, an enterprise has lower cash balance in spite of higher profits or has higher cash balance in spite of lower profits. Reasons for such situations can be analysed with the help of Cash Flow Statement.
The limitations of Cash Flow Statement are:
  • Non-cash Transactions are not Shown: Cash Flow Statement shows only inflows and outflows of cash. It does not show non-cash transactions like the purchase of building by issue of shares or debentures to the vendors or bonus shares.
  • Not a Substitute for an Income Statement: Income Statement shows net income of the enterprise based on accrual basis of accounting whereas Cash Flow Statement shows only cash inflows or outflows which does not represent net profit earned or loss incurred by the enterprise.
  • Not a Substitute for Balance Sheet: It is not a substitute for Balance Sheet (Position Statement) because it does not show the financial position (i.e., Equity, Liabilities and Assets)

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