CAT / FIA FFA Syllabus F. Preparing Basic Financial Statements - Benefits and drawbacks - Notes ^{2 / 5}

One of the most useful financial statements produced by a business is the statement of cash flow because it provides a clear and understandable picture of cash movements over the financial year.

A statement of cash flow provides useful additional information that is not provided by the statement of profit or loss.

For example, it identifies whether cash has increased or decreased from one year to the next and also where the cash has come from.

Statements of cash flow are a useful addition to the financial statements of a company because accounting profit is not the only indicator of performance.

They concentrate on the sources and uses of cash and are a useful indicator of a company's liquidity and solvency.

Also, users of accounts can readily understand cash flows, as opposed to statements of profit or loss and statements of financial position which are subject to manipulation by the use of different accounting policies.

However, the main weakness of a statement of cash flow is that it is a historic statement.

Therefore, it does not indicate whether the business will be able to meet its debts in the future.

A more helpful statement would be a forecast statement of cash flow.