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Could problems at Enron have been uncovered earlier?

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1. Many analysts place more importance on the income statement than they do on the statement of cash flows. Do you think the problems at companies such as Enron would have been uncovered earlier if more emphasis was placed on the statement of cash flows? Why or why not?

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Solution Summary

The 568 word solution discusses the various financial statements including the preference to the income statement by most stakeholders. Then the solution presents examples of the inherent limitations in relying too much on the income statement. The information that can be viewed in the statement of cash flows is stressed as vital to understanding a company such as Enron.

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There is no doubt that the statement of cash flows is an important piece of the package of financial statements, yet by itself, it would lead to misinterpretations of the financial status of a company. An income statement can be equally misinterpreted without the other statements.

Many analysts place more importance on the income statement than they do on the statement of cash flows.

First, it is natural and right to emphasize the income statement because it is through the net results of operations that a company can grow its net assets. Many investors buy capital stock in companies that are growing sales and profits. It is a basic tenet of our capitalistic society to go and grow.

Secondly, analysts presume that audited financial statements follow prescribed pronouncements by the FASB and SEC. As a result of following these guidelines, income ...

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