UGM June 2019 Q5
0. Cash Flow Analysis is an important financial tool for management. Its chief advantages are:
- Option : A
- Explanation : A Cash Flow Statement is useful for short-term planning. A business enterprise needs sufficient cash to meet its various obligations
in the near future such as payment for the purchase of fixed assets, payment of debts maturing in the near future, expenses of the
business, etc. A historical analysis of the different sources and applications of cash will enable the management to make reliable cash flow projections for the immediate future.
In may then plan out for investment of surplus or meeting the deficit if any. Thus, cash flow analysis is an important financial tool for management. Its chief advantages are as follows:
Helps inefficient cash management: Cash flow analysis helps in evaluating financial policies and cash position. Cash is the basis for all operations and hence a projected cash flow statement will enable the management to plan and coordinate the financial operations properly. The management can know how much cash is needed, from which source it will be derived, how much can be generated internally and how much could be obtained from outside.
Helps in internal financial management: Cash flow analysts provides information about funds that will be available from operations. This will help the management in determining policies regarding internal financial management, e.g., the possibility of repayment of long-term debts, dividend policies, planning replacement of plant and machinery, etc.
Disclosure the movements of cash: Cash flow statement discloses the complete story of cash movement. The increase in or decrease of cash and the reasons therefore can be known. It discloses the reasons for low cash balance in spite of heavy operating profits or for heavy cash balance in spite of low profits. However, a comparison of the original forecast with the actual results highlights the trends of movements of cash which may otherwise go undetected.
Discloses success or failure of cash planning: The extent of success or failure of cash planning can be known by comparing the projected cash flow statement with the actual cash flow statement and necessary remedial measures can be taken.
