The following are considered limitations of the cash flow statement.

1-Non-cash transactions are ignored

The cash flow statement does not consider non-cash transactions. For instance, depreciation, impairment, provisions, and other non-cash expenses are ignored. Hence, essential accounting concepts are ignored, leading to questions about the cash flow statement’s usability.

4-Classification may not be objective

The cash flow statement has three categories: operating, investing, and financing. The category for classification is not always selected easily. For instance, dividend payment can be seen in investing/financing activities depending on the interpretation and understanding of the business management. Hence, it can be a real challenge to classify and compare the cash flow statements of different businesses.

2-Timing of cash flow is not accounted for

The cash flow statement does not provide details about the cash flow timing. There is no precise date/timing for the cash in/outflow. The statement only provides a summary of the cash transactions and not timing. Hence, it seems challenging to understand cash flow movement accurately.

3-Does do not provide detailed information

The cash flow statement contains summarized numbers and movement. It’s not possible to understand detailed transaction aspects by looking at the cash flow statement. Hence, only a limited understanding can be concluded based on it.

5-May not be comparable

Every business is different in terms of operations, accounting policies, interpretations, assumptions, external economic impacts, and the owners’ risk appetite. Hence, comparing cash movement for the business may not be logical.

6-Not helpful in profitability assessment

The cash flow statement is focused on the cash flow analysis only. It ignores the business’s profit-earning capacity. So, even aggressive cash outflows from businesses may not be a symptom of bad financial performance. It’s nearly impossible to assess a business’s financial performance by looking at the cash flow statement.

7-Not much helpful in liquidity assessment

The cash flow statement only shows cash movement and does not show the picture of liabilities falling due in the near future. So, this statement can only be used in addition to other statements. Hence, it does not add significant value when used alone.

8-Historical numbers are used

The numbers in the cash flow statement are based on history. So, the analysis and trends predicted by looking at the cash flow statement are past figures that may not be indicative of future performance. Hence, analysis using the cash flow statement brings little value.

9-Does do not consider the accrual concept

The cash flow statement is based on the cash basis of accounting. It completely ignores the accrual concept, which is the fundamental basis of modern accounting. Hence, it may be missing an essential element of accounting principles.

Conclusion

A cash flow statement is a comprehensive and advanced cash analysis statement that provides significant analysis value. However, it comes with certain limitations.

The limitations of the cash flow statement include but are not limited to, ignoring non-cash items, subjective classification, the timing of cash flow not accounted for, not providing detailed information about cash movement, not being comparable, not being very helpful in profitability and liquidity assessment, and using historical numbers.

Hence, this cash flow statement should be used with other financial statement components for financial analysis.