Question

Usefulness of income statement and cash flow statement for the invsetors

Answer 1

The Investors are among one of the most important users of financial statements. Income Statement gives a detailed view of all the incomes of the Company both direct as well as indirect incomes. Direct incomes as the name suggest are directly related to operations of the company like sales of toys by a Toy Company . Indirect Incomes are for example Rent earned, Interest earned etc. Classification of Direct and Indirect incomes are dependent entirely upon the nature of Business. Similarly the same concept applies to Direct and Indirect expenses. As an Investor, one is always curious about Sales,Net Revenues, Net profit, EBIT, EBITDA etc to know how's company is actually performing. Also its important for the investors to make better comparisons for selecting best company to invest in.

Cash Flow Statement shows the cash inflows and outflows in the business. It depicts the flow of cash during a period in three segments like

• Cash Flow from Operating Activities
• Cash Flow from Investing Activities
• Cash Flow from Financing Activities

Its important for investors because it shows ability of the company to pay its payable/debts etc. Sometimes company being enough profitable but even short on cash for making some immediate payments.

For example, Company making sales in Hundreds of millions but say majorly on credit terms and making payment of expenses in cash. So though Company showing good Net Profit but Not having enough cash to meet some immediate Statutory payments causing some heavy penalties too. So it becomes quite crucial to study Income Statement as well as Cash Flow Statement.