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Chapter 22

Cash flow information

3.1 Advantages of statements of cash flow

 Helps users make judgements on future cash flows

 Indicates the relationship between profit and cash generated

 Helps users check accuracy of previous assessments

 Difficult to manipulate

3.2 Limitations of statements of cash flow

 Based on historical information, so no predictive quality

 Small scope for manipulation, e.g. delay payments at year-end

 No indication of profitability, necessary for long-term survival

3.3 Interpretation of statements of cash flow

When reviewing a statement of cash flows focus on the following areas:

 Cash generated from operations – indicates sustainability

 Capital expenditure

 Sources of finance

 Net cash flow

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