Question

Distinguish between cash flow, as reported on the statement of cash flows, and accrual-based income, as reported on the income statement; discuss the importance of cash flows to investors, relative to accrual-based income

Answer 1

The balacesheet and P& L a/c (Income statement)are basic financial statements of a business enterprise. A Balance sheet shows financial position of firm where as P&L a/c shows financial performance. Revenues recorded in P&L doesnot reflect cashinflows as the debtors may pay later.Likewise some of the expenses in P&L a/c are non cash expenses (depriciation) . ie. it doesn't provide information about investing & financing activities. The fird financial statement a company required to prepare is Cash flow staement.

A cash flow staement provide informations about cash flows associated with investing , financing & operating activities. The cash flow statement shows , company's cash inflows and outflows over a period. The income statement shows a company's revenue and total expenses, including noncash accounting such as depreciation, over a period.The majour differences between Casflow staement and Income statements are follows;

Casflow staement	Income statements
Provide information about liquidity	Provide information about financial performance
Prepared on cash basis	Prepared on accural basis
It presents the movements in financial position of a business	It deals with two accounting elements, i.e. income and expenses
It  has a less number of standards, policies and concepts to follow.	It follows accounting policies, and standards and concepts
It is prepared by using income statement and balance sheet details.	It is prepared by using records and ledger accounts.

Cash flow or Profit which one is important

Profit is the amount  remaining after deducting business costs, while cash flow is the amount of money flowing in and out of a business at any given time. Profit is more indicative of business's success, but cash flow is more important to keep the business operating on a day-to-day basis.The cash flow report is important because it informs the reader of the business cash position. It needs cash to pay its expenses, to pay bank loans, to pay taxes and to purchase new assets. A cash flow report determines whether a business has enough cash to do exactly this

Importance of cashflow staement to investors

cash flow statememt is significant to investors of a company. Dividend payable to shareholders are obviously dependent on cash flows; cashflows , intterest payments nad ddebt repayement to lenders requires the availibilty of cash.The statement of cash flows is very important to investors because it shows how much actual cash a company has generated. The income statement, on the other hand, often includes noncash revenues or expenses, which the statement of cash flows excludes . It enables investors to use the information about historic cash flows of a company for projections of future cash flows on which to base their investment decisions. It helps in providing information regarding the cash-generating abilities of the entity’s core activities.Shareholders and investors tend to compare the Cash Flow Statements of different companies as it helps them to reveal the quality of their earnings. This helps in making them the right decision.It provides to them Provides insights about the liquidity and solvency of a firm, which is vital for the survival and growth of any organization.