Discuss the significance or uses of cash flow statement.
Cash Flow Statement is very useful to the management for short-term planning due to the following reasons:
It provides information about an enterprise’s liquidity, flexibility and ability to generate future cash flows, which is critically important to survival and to successful growth.
It provides information about cash flows from operating, investing and financing activities.
It can provide information about an entity’s ability to meet its obligations as they become due.
It will help in assessing likely future financing needs.
It enables the management to check the tendency or overspend. A comparison of Cash Flow Statement of previous year with the budget for that year indicates to what extent cash of the company were applied according to plan.
It provides information about cash flows from operation. Therefore, it is useful to internal financial management in considering the possibility of paying the long term debt, planning the replacement of fixed assets and formulating dividend policies.
It provides information relating to surplus or deficit of cash. An enterprise, therefore, can decide about the short term investment of the surplus and can arrange short term credit in case of deficit.
It enables the management to know about the causes of changes in cash position of the firm.