Question

Why do you think a third financial statement is important? Do we not get everything we need from the Balance Sheet and Income Statement? What information does the Cash Flow Statement give us that is unique, and why do investors need that information?

Answer 1

Yes, the third Financial Statement (Cash Flow Statement) is important.

Information related to followings two questions should not get from the Balance sheet and Income statement.

Question 1: How can the company generate cash flow (Under which activity)?

Question 2: How can company cash flow provide to activity (if any)?

In simple words, Cash flow statement acts as a bridge between the Both financial statement (Balance sheet and Income statement).

Cash flow statement provides information relating to cash inflow and outflow and helps to understand the change in cash between two accounting periods.

why do investors need that information?

Investor should always attention with earnings of the company. Cash flow from operating activity and net income help to determine the quality of earnings. (Hint: cash from operating activities is higher than net income then earnings should be considered as high quality.)

It helps to understand the Expansion level of the company. Whenever company buys additional equipment or plant then these items should clearly mention in the cash flow statement.

It provides view from an overall liquidity point of view.