Question

When considering an investment opportunity, some investors believe the organization’s statement of cash flows is the most important factor in evaluating the health of the organization. Others argue that the investors should not use statements of cash flows because they do not show true profitability. For example, depreciation is only considered on the income statement, not on the statement of cash flows. Take a position on whether or not you agree with investor use of statements of cash flows, and provide support for your position.

Answer 1

"When considering an investment opportunity, some investors believe the organization’s statement of cash flows is the most important factor in evaluating the health of the organization."I completely agree with that

Users of the statement of cash flows are primarily interested in whether the company has positive cash flows from operations. As a general rule, a company should be covering its costs by the cash it brings in from the day-to-day running of the business, rather than from borrowed funds.

A potential investor or creditor wants to see that cash the company brings in through operations exceeds any cash brought in by selling assets or borrowing money. This is because selling assets or borrowing money can never be construed as a continuing event, such as bringing in cash from selling goods or service

An investor wants to make sure the corporation has enough cash flow to pay an adequate return on investment. In other words, can the investor anticipate getting a cash dividend each year?

Also important is using the statement of cash flows to evaluate how well the company is managing its cash because investors may eventually sell their shares of stock. If the company mismanages its cash to such a point that it goes out of business, there won’t be any buyers for the company’s stock — the stock may be worthless.