Certified Financial Management Specialist Practice Exam

What is one of the limitations of cash flow analysis?

1. It is always accurate

2. It reflects current investment potential accurately

3. Past data may not reflect current investment potential

4. It considers only operational efficiency

The correct answer is: Past data may not reflect current investment potential

Cash flow analysis provides valuable insights into a company’s financial health by examining the inflows and outflows of cash over a specific period. However, one significant limitation is that past data may not reflect current investment potential. This is critical because cash flow patterns can change due to various factors such as market dynamics, shifts in consumer preferences, economic fluctuations, or changes in management strategies. Reliance on historical cash flows can mislead investors or managers about future performance if the business environment or internal processes have significantly changed. Thus, while cash flow analysis is a powerful tool, it is essential to consider current market conditions and future projections to make informed investment decisions.