Question

The cash flow statement was not required by GAAP until 1988. Why do you think the SEC added the cash flow statement to the required annual reports? What is its importance for managers and external investors? What is the importance of Ratio Analysis for both management and external investors?

Answer 1

Importance of cash flow statement.

When an investor/shareholder is conducting due diligence and projections for a particular company, it as the most important statement.

Enables investors to use the information about historic cash flows of a company for projections of future cash flows on which to base their investment decisions.

Shows the changes in the balance sheet, and helps in analysing the operating, investing and financing activities.

Provides insights about the liquidity and solvency of a firm, which is vital for the survival and growth of any organization.

Shows the financial position of an entity during a period of time.

Helps in providing information regarding the cash-generating abilities of the entity’s core activities.

Shareholders and investors tend to compare the Cash Flow Statements of different companies as it helps them to reveal the quality of their earnings. This helps in making them the right decision.

Assuming the company has some long-term debt obligations, a Cash Flow Statement helps the investors and shareholders to determine the possibility of repayment. It can be used to easily predict the timing, amounts, and uncertainty of future cash flows.

Importance of ratio analysis

*Analysis of Financial Statements

*Helps in Understanding the Profitability of the Company

*Analysis of Operational Efficiency of the Firms

*Liquidity of the Firms