Question

Companies file for bankruptcy protection more often than not due to cash problems. We know from studying accrual accounting that profits and cash flow most often have different timing. Comment on how the income statement and the cash flow statement are connected. Do you feel both statements provide sufficient information for internal managers and external investors to make good decisions? Provide support for your response.

Your grade is calculated based on your personal response to the discussion topics AND responses to at least two classmates. Your discussion post and responses to classmates must be substantive. As a guideline, your discussion should be 3 - 4 paragraphs comprised of 5 -7 sentences per paragraph. Your responses to classmates should each be 2 -3 paragraphs with 5-7 sentences per paragraph.

Answer 1

Comment on how the income statement and the cash flow statement are connected.

For preparation of cash flow statement, income statement and balance sheet are very important link because all non-cash items, revenue inflow and expenses outflow can be known from the income statements whereas

the balance sheet provides the details of changes in working capital, changes in debt, equity, increase decrease in assets details for two consecutive financial year.

Do you feel both statements provide sufficient information for internal managers and external investors to make good decisions? Provide support for your response.

Yes , Both Cash flow and income statement are important and they do provide the sufficient information for internal and external investors to make a good decision. The purpose of cash flow statement and income statement is as under

Cash flow statement.

The main reason behind preparing the cash flow statement is understanding the source of cash inflow and where the cash received is utilized, i.e. From where the cash comes and where the same is utilized during the period of time which may be a month, quarter or a financial year.

Cash flow statement is prepared to know the liquidity of the company or an organization or a particular department. With the help of cash flow statement, reader of financial statement can understand activity wise cash inflow and outflow and also it is useful to external parties to financial statements for decision making purpose.

The purpose of preparing the cash flow statement is as under:

·         Cash flow statement show the total inflow and outflow of cash for the business purpose during a particular period

·         It helps to understand the liquidity position of the company,

·         It helps to management for decision making such as future growth or expansion

·         Management of company can know the option of debt and equity and which is more beneficial to them from cash flow statement

·         Dividend pay-out can be decided on the basis of cash flow statement

·         Cash flow statement is a required as per the generally accepted accounting principles

·         Management , external parties to financial statements get idea about the inflow and outflow of cash from different activity

·         It show the actual cash profit to the company

Income Statement

1) The main purpose of income statement is to provide the detail of profitability to various internal and external stake holder such as investors, government, employees, creditors , debtors. They could understand that what is operational profit of the company

2) The lender of the fund can understand what is the companies actual position

3) Stake holder of company can understand the taxation working and what amount of tax company pay on the profit

4) Majors expenses of a company can be known

5) Income statement is very useful in preparing cash flow statement

It can be understood from the above points that both the statements provide sufficient and relevant information to external and internal parties to financial statements