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What is Cash Flow Statement ? Explain its THREE Limitations.

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A Cash Flow Statement is a Statement showing Inflows (Receipts) and Outflows (Payments) of Cash during a Particular Period . In other words , it is a Summary of Sources and Application of Cash during a particular span of time . It Analyses the reasons for Changes in the Balance of Cash between the Two Balance Sheet Dates . The term “Cash” here stands for Cash and Cash Equivalents . A Cash Flow Statement includes only those Items which Affect Cash . 

Following are the Limitations of a Cash Flow Statement : 

  • Not Suitable for Judging the Liquidity : It does not present True Picture of the Liquidity of a Firm because the Liquidity does not depend upon Cash Alone . Liquidity also depends upon those Assets which can be easily converted into Cash . Exclusion of these Assets observes the True Reporting of the Ability of the Firm to meet its Liabilities when they become Due for Payment . 
  • It Ignores Non – Cash Transactions : Cash Flow Statement Ignores Non – Cash Transactions like Purchase of Fixed Assets by Issuing Shares or Debentures , Conversion of Debentures into Shares , Issue of Bonus Shares etc. Hence the true position of an enterprise cannot be judged by Cash Flow Statements .
  • It Ignores the Accrual Concept of Accounting : It is prepared on Cash Basis and Hence Ignores one of the Basic Concepts of Accounting , namely Accrual Concept .

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