Cash Flow Statement Limitations

The assignment discusses the limitations of cash flow statements in providing a comprehensive review of a company's financial position. It argues that while cash flow statements illustrate cash inflows and outflows, they fail to capture profitability, projected cash flows, and inter-industry comparisons. The analysis utilizes Slater and Gordon's case study, where their negative cash flow statement did not reflect the company's substantial debt and losses, highlighting the limitations of relying solely on cash flow data for financial assessment.

WEEK 12 TUTORIAL QUESTIONS
CASH FLOWS STATEMENT I
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QUESTION 1
Statement showing Net Cash from Operating Activities (In
$)
Particulars Amount Amount
Cash Receipts from customers (Working Note 1) 419000
Cash Payment to Suppliers (Working Note 3) (160000)
Cash Payment as Wages (Working Note 4) (40000)
Cash Payment as Other Operating Expense (Working Note 5) (60000)
(A) Cash generated from Operations 259000
Tax Payment (Working Note 6) (4500)
Interest Received 20000
(B) Net Cash from Operating Activities 274500
Workings
1. Account Receivable A/c (In
$)
Particulars Amount Particulars Amount
To Balance b/d 260000 By Bad Debts 1000
To Sales 300000 By Cash Received
from Debtors
(Balancing Figure)
419000
By Balance c/d 140000
560000 560000
2. Provision for Doubtful Debts A/c (In
$)
Particulars Amount Particulars Amount
To Debtors A/c
(Balancing Figure)
1000 By Balance b/d 20000
To Balance c/d 21000 By Revenue Account 2000
22000 22000
3. Accounts Payable A/c
(In $)
Particulars Amount Particulars Amount
To Cash Payment to
Accounts Payable
(Balancing Figure)
160000 By Balance b/d 260000
To Balance c/d 260000 By Cost of Goods Sold 160000
420000 420000
4. Accrued Wages Account
Particulars Amount Particulars Amount
To Cash (Balancing
Figure)
40000 By Balance b/d 40000
To Balance c/d 60000 By Wages Account 60000
100000 100000
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5. Other Operating Expense Provision Account
Particulars Amount Particulars Amount
To Cash (Balancing
Figure)
60000 By Balance b/d 20000
By Operating Expense
Account
40000
60000 60000
6. Current Tax Payable Account
Particulars Amount Particulars Amount
To Cash (Balancing
Figure)
4500 By Balance b/d 3000
To Balance c/d 7500 By Wages Account 9000
12000 12000
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QUESTION 2
ANALYSE
Identify the issue and why it matters. Determine what you need to find out.
RESEARCH
Present relevant facts and evidence, or issues.
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Anticipate: Case study of Slater and Gordon is landmark case for market
crash and business failure as it showcases various significant
aspects related to accounting and finance. One of this issue was
limitation of cash flow statement due to which company
statement does not provide a timely cautionary sign regarding the
financial trouble
Reflect: Limitation associated with the cash flow
 Cash flow is unable show net income: It is often stated that cash
flow is not able to represent business’s net income for a given
accounting period as it does not take non- cash item into consideration
that can be easily determined by a profit and loss account.
 Fails to consider solvency and liquidity: It does not assist in
considering liquidity position of a business, effective and accurate
solvency position is not determined from this statement, it only assist
how much of requirements can be met (Palepu, Healy & Peek, 2013).
 No profitability assess: Basically, cash flows from operation is not
able to consider company’s profitability, as it neither assess the actual
costs nor incomes.
 Does not measure projected Cash Flows: Cash flow preparation is
based on historical or past cost and by considering this it does not
assist in knowing the near future/proposed cash flows.
 Fails to compare inter-industry: As the cash flow statement does
not evaluate efficiency in economy of a company with other inter-
industry, take an example, a company holding less investment on
capital will hold low cash flow comparatively to the company having
further capital investment and a high cash flow.
Engage: By considering the case study of Slater and Gordon has admitted
that their financial position is not well and they are operating at the mercy of
its lenders.
The most recent financial accounts of the company for 6 months to the
yearend 2016, disclosed its debts were going above its total assets by the
amount of $126 million and the cash flow statement of the company turned as
negative by $11.4 million (Bhandari & Iyer, 2013).
The company was in debt, and incurred a total loss of $425 million$ for 6
months to yearend, further it wrote down the value of their business by $350
million and consequently their revenue slumped. None of this fact was
revealed in their previous cash flow statement as liquidity does not showcase
profitability.

EVALUATE & ANSWER
Provide your opinion based on your discussion of relevant facts, evidence, or issues.
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Act: On the basis of above analysis; I agree with the cited statement that cash
flow statement does not provide appropriate review of financial position
as it merely shows inflow and outflow of cash and supported by several
limitations.

REFERENCES
Bhandari, S. B., & Iyer, R. (2013). Predicting business failure using cash flow statement based
measures. Managerial Finance, 39(7), 667-676.
Palepu, K. G., Healy, P. M., & Peek, E. (2013). Business analysis and valuation: IFRS edition.
Cengage Learning.
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