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Cash flow statements should normally be used in conjunction with income statements and balance sheets when making an assessment of future cash flows.
- Cash flow statements are based on historical information and therefore do not provide complete information for assessing future cash flows.
- There is some scope for manipulation of cash flows. For example, a business may delay paying suppliers until after the year-end, or it may structure transactions so that the cash balance is favourably affected. It can be argued that cash management is an important aspect of stewardship and therefore desirable. However, more deliberate manipulation is possible.
- Cash flow is necessary for survival in the short term, but in order to survive in the long term a business must be profitable. It is often necessary to sacrifice cash flow in the short term in order to generate profits in the long term. A huge cash balance is not a sign of good management if the cash could be invested elsewhere to generate profit.
Neither cash flow nor profit provide a complete picture of a company’s performance when looked at in isolation.
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