Statement of Cash Flows versus the Income Statement
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According to SFAC No. 1, financial statements should provide information that is useful for investor decision making. Paragraph 37 of SFAS No. 1 states that financial reporting should provide information to help users assess the amounts, timing, and uncertainty of prospective cash flows. Paragraph 43 of SFAC No. 1 states that the primary focus of financial reporting is information about an enterprise's performance provided by measures of earnings and its components.
A. Present arguments that the statement of cash flows, not the income statements, is the most important financial statement to prospective investors.
B. Present arguments that the income statement, not the statement of cash flows, is the most important financial statement to prospective investors.
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Solution Summary
The usefulness of the statement of cash flows versus the income statement is examined.
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Meaning of income statement:
Income statement shows the financial results of the company for the particular financial period. It shows the profit or loss of the company. It shows the operational efficiency of the company. It shows how much money came into the company as revenue and how much money spent as expenses and the net effect of sales and expenses. The net effect will be profit or loss. Income statement is not necessarily to be tallied unless income equals expenses.
Meaning of cash flow statement:
Statement of cash flow shows the movement of cash from operating, investing and financing activities of the company. It shows the short term solvency of the company. It shows the company's flow of cash both inflow of cash and cash equivalents and outflow of cash and cash equivalents.
Arguments that statement of cash flows and not the income statement is the most important to the potential investors.
1. Prospective investors are bothered about whether the cash is managed efficiently because if the cash is not managed ...
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