Question

Explain the limitations of a cash flow statement.

Answer 1

1. Cash flow statement does not disclose net income from operations. Therefore, it cannot be a substitute for income statement.
2. The cash balance as shown by the cash flow statement may not represent the real liquidity position of the business because it can be easily influenced by postponing the purchases and other payments.
3. Cash flow statement cannot replace the funds flow statement. Each of the two has a separate function to perform.