A Cash Flow Statement only reveals the inflow and outflow of cash. The cash balance disclosed by this statement may not depict the true liquid position. There are controversies over a number of items like Cheques, stamps, postal orders etc. to be included in cash.
A Cash Flow Statement cannot be equated with the income statement. An income statement takes into account both cash and non-cash items. Hence Cash Fund does not mean net income of the business.
Working Capital being a wider concept of funds, a funds flow statement presents a more complete picture than cash flow statement.
Fails to Present Net Profit: The cash flow statement fails to present the net income of a firm for the period as it ignores non-cash items which are considered by Profit and Loss Statement. The cash flow statement does not help to assess profitability as it neither considers cost nor revenues. However, it can be used as a supplement to the income statement.
Not a substitute to Funds Flow Statement or Income Statement: The functions which are performed by funds flow statement or income statement cannot be done by cash flow statement.
Industry Comparison not possible: As the cash flow statement does not measure the efficiency of the firm, intercomparison with other inter-industry is not possible. A firm having less capital investment shall have less cash flow than the firm which more capital investment resulting in higher cash flows.
Does not Properly Assess Liquidity position: In a practical scenario, the cash flow statement does not assess liquidity or solvency position of the firm as it presents cash position only on a particular date. It only helps to know what amount of obligation can be met. In nutshell, it does not represent the real liquidity position.
It does not give complete picture of the financial position of the business concern.
The preparation of cash flow statement is only postmortem analysis. There is no projection of cash in future in this method.
It is not a substitute of Income Statement.
The accuracy of cash flow statement is based on the balance sheet. If balance sheet is wrong, the cash flow statement is also wrong.
It is not prepared on the basic accounting concept of accrual basis. Hence, the accuracy of cash flow statement is questionable.
It is not suitable for judging the profitability of a firm as non-cash items are not included in the calculation of cash flow from operating activities.
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