What are the advantages and disadvantages of Cash flow accounting

October 14th, 2010 Comments off
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Append below are the advantages and disadvantages of cash flow accounting:-

ADVANTAGES of cash flow accounting:(a) Cash flow accounting critically looks at a company ABILITY TO GENERATE CASH. Without cash, a company cannot survive

(b) Cash flow is more “direct” as “profit” is highly dependent on accounting conventions and concepts/principles

(c) Cash flow reporting satisfies the needs of all users better since cash flow is more direct with its messages. Some of the interested user parties are:

(i) Creditors  -repayment of debts, overdue accounts

(ii) Management -cash flow reporting provides the type of information which decision should be taken re: relevant costs ( decision based on future cash flow)

(iii)Shareholders & Auditors -cash flow accounting and reporting can provide a satisfactory basis for stewardship accounting

(iv) Workers/staff needs to know that they are able to be paid for their wages & salaries and the enterprise they are working are stable

(d) Cash flow forecasts are easier to prepare plus more useful than profit forecasts

(e) Cash flow accounting in certain respects can be audited more easily than accounts based on the accruals or matching concept

(f) Accruals concept is more confusing whereas cash flows are more easily understood

(g) Cash flow with future projections or forecast are of great information value to all users of accounting information.[ should include variance analysis of the forecast by monitoring against actual cash flow]

DISADVANTAGES OF CASH FLOW ACCOUNTING:

The main disadvantage of  Cash flow accounting is that it ignores the accrual or matching concepts

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Financial Accounting

 
 

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