To What Extent Might the Cash Flow Statement Help to Overcome the Traditional Limitations of Financial Statement Analysis in Evaluating the Past Performance and Predicting the Future Successes or Failures of Business Organisations?

Topics: Financial statements, Income statement, Balance sheet Pages: 6 (1617 words) Published: September 20, 2009
To what extent might the cash flow statement help to overcome the traditional limitations of financial statement analysis in evaluating the past performance and predicting the future successes or failures of business organisations?

Accounting is the major means of organizing and summarizing information about economic activities. The information which is provided by the accounting practices through financial statement analysis, provides help to decision makers to take decision. There are various forms of Accounting models which is of great help example if the financial statements for an organization is made statements like Balance Sheet, Profit and loss Account etc it helps the organization out to makes its stand in the market

Financial analysis is the processes of extracting decision-making information from the existing knowledge such as financial statements, thus the main aim of financial analysis is to transform the facts and figure maintained into useful information which are basically used by stakeholders to take decision before making any kind of investment in any kind of organization.

The individuals who are engaged in performing the financial analysis? Firms, in order to analysis the firm’s financial performance and the financial position it actually helps to have a comparative analysis which is an aid for decision making processes for an organization. The analysis is not just about “crunching numbers”; it involves obtaining a broader picture of the organisation in order to evaluate appropriately how that organisation is performing. It give a broader and clear picture which attaches meaning to the numbers and make everything.

There are two approaches to analysis the statements Traditional approach and Modern approach. The financial statements which are used in traditional approach are Balance sheet Income statement and one more tool which is used a traditional method is Ratio analysis


Balance sheet is a method of listing all the assets, liabilities and residual value of equity. The primary difference between various kind of balance sheet is the level of information given in every balance sheet .There are at times the when the information is separated out or either lumped together example the smallest form of balance sheet is consisting of only assets and liabilities and can be included in one page. Where as in other form there will be pages of sub headings under one main heading of assets and liabilities

Ratio Analysis:

If the financial statement items are converted into ratios it can answer many doubts and queries about the economic status of the company, as in is the profit earned is satisfactory? Because in Ratio Analysis there is comparison of data, not only one single individual data which will leave the individual with half information. If we consider the Income statement of a particular company the profit earned by it would not be the actual amount profit earned because it has to be matched with expenses

We can talk about the actual profit when there is a matching concept and after considering the matching concept that is revenue earned by the company is matched by the expenses earned by them it had . Are the assets and other resources utilised is a efficient manner? The answer to all these questions can be acquired by analysing the financial statements through Ratio analysis. It benefits organisation a lot by making sense out of numbers which help to pot ray the company’s strengths of the company which an individual can understand with only one glance.

In ratio analysis the statements are compared internally as well as externally. In internal ratio analysis the statements are considered of the same firm to compare with the current year. External ratio analysis is of great help in the making a comparison with other firms which will be of useful to withstand the competition this will help a company to plan and properly have a strategic...
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