This chapter explains how different stakeholders use the statement of cash flows, and where its usefulness has limits. The statement is often seen as reliable because it reports actual cash movements, but it still needs to be interpreted alongside the other financial statements.

Learning objective

By the end of this chapter, you should be able to:

Explain the benefits and drawbacks to users of the financial statements of a statement of cash flows.

Benefits to users

For all users:

The statement of cash flows reports actual cash received and cash paid. That makes it more objective than profit, which depends on estimates and judgments (for example, depreciation rates, provisions, and valuations). Cash flows are generally easier to verify and are less affected by accounting policy choices.

This is a key reason the statement of cash flows is a useful complement to the statement of profit or loss. Two companies in the same industry can report different profit figures simply because they use different accounting policies (such as different depreciation methods or different assumptions about provisions). Cash, however, is cash: the amounts received and paid during a period are matters of fact rather than judgment. That makes cash flow information a more objective basis for comparing entities.

For investors:

Investors use operating cash flow to assess whether the company can generate cash from its core activities. This matters because cash generation ultimately supports dividend payments and long-term sustainability.

The statement also helps investors see whether growth is being funded internally or depends on external financing. A company with strong, consistent operating cash flows can often fund growth, pay dividends, and service debt without relying heavily on borrowing or issuing new shares.

In contrast, a company that reports healthy profits but consistently negative operating cash flows may raise concerns. It suggests profit is not being converted into cash, which can point to issues such as:

weak working capital management
aggressive revenue recognition
deteriorating receivables quality

For lenders:

Banks and other creditors focus on whether the company generates enough cash to service debt. Operating cash flow provides evidence of the business’s capacity to meet interest payments and repay loans.

Lenders are often interested in the ratio of operating cash flow to total debt, because it indicates how long it might take the business to repay borrowings from its own cash generation. Strong and consistent operating cash flows generally indicate lower credit risk, and lenders use this information when deciding whether to extend credit and on what terms.

For management:

The statement of cash flows helps management see:

whether operating activities generate sufficient cash
whether the company is investing for future growth
how financing is structured

Used alongside the income statement and balance sheet, it contributes to a more complete financial picture.

For internal decision-making, management can use the statement to identify periods of cash surplus or shortfall, plan for capital expenditure, and assess whether additional finance is needed. It also helps management evaluate working capital efficiency - for example, whether slow collection of receivables or excessive inventory levels are tying up cash that could be used more productively.

For suppliers:

Suppliers can use cash flow information to assess whether they are likely to be paid on time. When a supplier extends credit, they want confidence that the customer can settle obligations as they fall due.

Reviewing the customer’s statement of cash flows - especially operating cash flows and closing cash balances - can provide insight into short-term liquidity trends. This can help suppliers make decisions about credit terms and exposure limits.

Drawbacks and limitations

Historical focus: Like other financial statements, the statement of cash flows reports past events. Past cash flows may not predict future cash flows accurately, especially in rapidly changing business environments. A business that generated strong cash flows last year may face very different conditions this year due to economic changes, industry disruption, or the loss of a major customer. Historical cash flow data is informative, but it isn’t determinative of future performance.

Limited analytical detail: The statement groups cash flows into broad categories (operating, investing, financing). It may not reveal specific cash flow problems within departments or product lines. For example, positive overall operating cash flow could hide the fact that one division generates cash while another consumes cash at an unsustainable rate. Users who need this level of detail typically rely on management accounts or supplementary disclosures.

No performance measurement: Cash flow alone doesn’t measure profitability or return on investment. A company can generate cash by selling assets or cutting essential spending, which may harm long-term prospects. For example, selling a major asset may improve short-term liquidity but reduce the company’s ability to generate future revenues. This is why the statement of cash flows should be read alongside the statement of profit or loss and the statement of financial position.

Manipulation possibilities: Although cash flows are generally harder to manipulate than profit, management can influence the timing of certain transactions to present a more favorable year-end cash position. For instance, a business might accelerate customer collections before year-end or delay payments to suppliers to inflate the closing cash balance. These actions don’t change the underlying financial health of the business, but they can create a misleading impression of liquidity at the reporting date.

Doesn’t capture non-cash transactions: Significant non-cash events - such as asset exchanges, conversion of debt to equity, or non-cash acquisitions - don’t appear in the statement of cash flows, even though they may be economically important. For example, acquiring another business through a share-for-share exchange would be invisible in the cash flow statement. IAS 7 requires these transactions to be disclosed in the notes, so users need to read those disclosures to get a complete picture.

Cash flow statements provide objective, verifiable information less susceptible to manipulation than profit.
Investors assess dividend-paying capacity and sustainability through operating cash flow generation patterns.
Lenders evaluate debt servicing ability by examining cash generated from business operations.
Suppliers use cash flow information to assess a customer’s short-term liquidity and likelihood of settling obligations on time.
Management uses the statement to plan capital expenditure, manage working capital, and assess the need for additional financing.
Historical focus limits predictive value; cash flows don’t guarantee future financial performance.
Non-cash transactions like asset exchanges aren’t captured despite their significant financial impact.
The statement of cash flows is most informative when read alongside the statement of profit or loss and the statement of financial position, as no single statement provides a complete picture on its own.

Next | 7.3 Incomplete records

Benefits and drawbacks