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(138)-THE ADVANTAGES OF CASH FLOW ACCOUNTING

Saturday, March 27, 2010

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.

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