Question

According to SFAC No. 1, financial statements should provide information that is useful for investors’ decision making. Paragraph 37 of SFAC No. 1 states that financial reporting should provide information to help users access the amounts, timing and uncertainty of prospective cash flows. Paragraph 43 of SFAC No. 1 states that the primary focus of financial reporting is providing information about an enterprise’s performance based on measures of earnings and earnings components.

Present arguments that the income statement, not the statement of cash flow, is the most important financial statement to prospective investors.

Answer 1

Well a good question.

It is mandatory for corporates to prepare a cash flow statement too. But it is not that important compared to income statement.

Think of a purchase made through a credit card where the funds will be paid in the next month. This means that the seller will receive the funds in the next month. If the seller only prepares a cash flow, the true income will not be shown because that cash flow does not include he sales made to you as said above.

In your personal life there involves credit transactions. Why don't you expect for a corporate there will exist credit transactions which are not occured in cash?

The answer to this is income statement. The income statement is prepared based on the accrual concept and not in the cash basis. So the credit card sale made by the seller will be included here in the income statement.

Hope you got a clarity as to the importance of income statement.