The Advantages of Cash Flow Accounting
Some of the advantages of cash flow accounting are as follows
- Cash flow reporting satisfies the needs of all users better,
1. For management, it provides the sort of information on which decisions should be taken: (in management accounting, “relevant costs” to a decision are future cash flows); traditional profit accounting does not help with decision making.
2. For shareholders and auditors, cash flow accounting can provide a satisfactory basis for stewardship accounting.
3. As described previously, the information needs of creditors and employees will be better served by cash flow accounting.
- Cash flow forecasts are earlier to prepare, as well as more useful, than profit forecasts.
- They can in some respect be audited more easily than accounts based on the accruals concept.
- The accruals concept is confusing, and cash flows are more easily understood.
- Cash flow accounting should be both respective, and also include a forecast for the future. This is of great information value to all users of accounting information.
- Forecasts can subsequently be monitored by the publication of variance statements which compare actual cash flows against the forecasts.
- Management need to control cash flows and the cash flow statement shows exactly which activities are generating and which using cash.