Advantages of Cash flow
* Cash flow is more “direct” as “profit” is highly dependent on accounting conventions and concepts/principles * 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: * Creditors -repayment of debts, overdue accounts
* Management -cash flow reporting provides the type of information which decision should be taken re: relevant costs ( decision based on future cash flow) * Shareholders & Auditors -cash flow accounting and reporting can provide a satisfactory basis for stewardship accounting * Workers/staff needs to know that they are able to be paid for their wages & salaries and the enterprise they are working are stable * Cash flow forecasts are easier to prepare plus more useful than profit forecasts * Cash flow accounting in certain respects can be audited more easily than accounts based on the accruals or matching concept * Accruals concept is more confusing whereas cash flows are more easily understood * 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
* Lack of Tracking- Payments to the business is recorded as they come in, as are payments out of the business. The dates and times of these transactions are not recorded, however, making it very difficult to track down specific payments if errors are suspected. Likewise, the lack of tracking makes it impossible to connect specific payments with items of inventory or services that are rendered by contractors or other third parties. Being unable to track these payments can be a major disadvantage if accounting errors occur. * Offset Payment Problems- Cash flow accounting lacks dedicated departments for accounts receivable and accounts payable, making it difficult to keep track of money owed to the business as well as money that the business owes. This becomes a larger concern when shipments and deliveries are billed separately from the actual delivery of goods or when the business performs services but does not receive immediate payment; unpaid debts and payments due can become lost or delayed, resulting in problems between the business and its suppliers or customers. * Lack of Oversight- Because cash flow accounting doesn't track the flow of money within a business, accounting errors can go unnoticed until they cause cash flow problems. Without the oversight provided by in-depth accounting and the separation of accounts payable and accounts receivable, financial reports can be produced which contain significant errors that simply haven't been noticed within the fluctuations of cash flow. This can result in financial reports and projections that are inaccurate or in some cases are significantly overstated. * Partial Payment Recording- When partial payments are made or received them aren't recorded as being only part of a larger payment. At first glance, a partial payment may appear as a full payment on a balance sheet and lead business managers to think that all money due to the business or all money owed has been paid. This can result in accounting errors and the unintentional underpayment of debts. Confusion can also arise if multiple partial payments are mistaken for full payments, leading to unnecessary audits and wasted time trying to find the source of the error. * Profitability Errors- Cash flow accounting does not accurately reflect the expenses required to generate income, making it difficult to determine how profitable a business actually is. Large purchases that may assist in operating the business for months or years will be matched only with the income of the period in which the purchase was made, making that period seem significantly less profitable. Likewise, significant expenses required to make...
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