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Usefulness of The Statement of Cash Flows Versus The Income Statement

Powerful Essays
USEFULNESS OF THE

STATEMENT OF CASH FLOWS VS THE INCOME STATEMENT

PART 1:

A. A cash flow statement records the actual movement of a company’s cash, it shows where cash has come in from and what has actually been paid during the year. The cash flow statement records cash movements from three activities: operating, financing and investing. Operating activities adjusts the profit for non-cash expenses and gains and the changed in working capital and provides the cash actually received after conducting operations. Financing activities record the financing of the company and investing activities records the capital expenditures of a company. It basically shows the ability for a company to generate cash, as many companies earn profit but fail due to the inability to fulfil its cash needs. Investors use the cash flow statement to calculate the ‘free cash flow’ which is calculated by deducting capital expenditures from the net cash from operating activities. This shows investors how much cash is available for the company to pay its dividends. The statement of cashflows is also helpful for existing investors to review where cash is being spent and how well it is being used (Daniel, Denis & Naveen 2010).

B.

• Liquidity: A company’s liquidity depends on the amount of liquid assets it possesses, which are cash or assets that can easily be converted into cash. The cash flow statement shows how much money is coming in and going out of the business therefore it shows how liquid a company is and how flexible it is to cope with emergencies. Working capital is a significant part of the cash flow analysis, it consists of the current assets less the current liabilities and can help assess the liquidity of the business for the upcoming accou...

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...the flexibility of the company to cope with emergencies. So as the statement of cash flows generate free cash flow, it can be said that it may be more useful for investors however, both reports should be used for a more reliable decision to be made (Fight, A, 2005).

REFERENCES

• Daniel, N, Denis, D & Naveen, L . (2010) Sources of Financial Flexibility: Evidence from Cash Flow Shortfalls*.[Online] p.2-20. Available from: http://business.nd.edu/uploadedFiles/Faculty_and_Research/Finance

• Fight, A. (ed.) (2005) , Cash Flow Forecasting, Butterworth-Heinemann, London.

• Sinha, G, 2009, Financial Statement Analysis, PHI learning private limited, New Delhi.

• Du 2014, Annual Report 2013, accessed 22/04/2014, http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NTM3Mzk4fENoaWxkSUQ9MjI2MjMyfFR5cGU9MQ==&t=1

• Date accessed: 21/04/2014, www.investopedia.com
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