Importance of Cash Flow Statement


CFS is very significant for financial planning. This statement is quite useful for preparing future plan and pre-determination of financial position. CFS is very significant in the following manner:

 

  • Since a cash flow statement is based on the cash basis of accounting, it is very useful in the evaluation of cash position of a firm.
  • A series of intra-firm and inter-firm cash flow statements reveals whether the firm's liquidity position is improving or deteriorating over a period of time and in comparison to other firms over a given period of time.
  • By preparing projected cash flow statement, a firm can come to know as to how much cash will be generated into the firm and how much cash will be needed to make various payments and hence the firm can well plan to arrange for the future requirement of cash.
  • CFS provides information of all activities classified under operating, investing and financing activities. Thus, CFS has great usefulness..
  • CFS prepared according to AS-3 (revised) is more suitable for making comparisons than the funds flow statement as there is no standard format for the same
  • CFS summarises the causes of changes in cash and cash equivalents position between the two Balance sheets.

Hence, with the help of CFS the cash position of the business can be evaluated, liquidity of the business can be measured. Nowadays, CFS has becomes an integral   part of Annual Report of the company.