Cash Flow Facts

Merits and Demerits of Cash Flow

We described Cash Flow Facts as the merits and demerits of cash flow discussing the cash flow statements as a whole.

The merits are as follows:

  1. Cash Flow aids in capital planning, which is concerned with the decisions made with regard to capital expenses.
  2. The cash flow statement designates a firm’s profitability and liquidity. The latter refers to the aptitude of a firm to meet its financial responsibilities at the time it is required to do this. The statement indicates a firm’s financial health within a specified time; it makes it possible to ascertain whether the firm will be profitable.
  3. This indicates whether a firm has an inadequacy of cash or whether some of its cash is lying idle or if it is in excess.
  4. It helps in planning and forecasting, further promoting the administration of finances within the company.

The disadvantages of the cash flow statement are as follows:

  1. It does not show net income. Consequently, it requires an observer to refer to other financial statements so as to gain more insight into the company.
  2. The statement only shows the cash and cash equivalents. Therefore, it only provides the cash aspect specific firm. It is impossible to determine the profits and losses of the company by just consulting the cash flow statement alone.

Cash flow analysis

The cash flow analysis is the process of exploring and investigating various avenues. That brings in cash to the firm and those that take cash from it. Importantly, the analysis is often carried out based on time. That is, the cash flow should be within a specified period, say monthly, weekly, quarterly, or annually. The analysis looks at all types of cash flow. That is the inflow and outflow of cash that is a consequence of investing, operating, and financing activities.  

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