Question

1. Which do you feel is more important, net income or net cash flow? Why?

2. What might a Cash Flow Statement tell you that an Income Statement would not?

3. The Cash Flow Statement has only been required in the United States since 1988. Why do you think it has risen in importance since then?

Answer 1

1. Both play an important role in running a business. A business should have net income with positive cash flows to run effectively and efficiently. But net cash flow should be given more importance than net income, as for running a business cash is required to pay for the bills and reimbursement. If there is cash crunch in a business, it is not possible to pay for the daily transactions despite the fact that the company is earning net income. Net cash flow plays a big part in the financial world of the business.

2. Cash flow statement is divided into three categories :

Cash flow from operating activities

Cash flow from investing activities

Cash flow from financing activities

So the cash flow statement clearly depicts from where the cash is generated the most and where it is being utilised in the business, so that decisions can be made accordingly.

For example, cash flow from operating activities is 100000

And in investing activities is (100000) shows cash generated from operations is utilised in investing in fixed assets / investments which is not possible to analyse from income statement of any business.

3. The risen importance is directly related to the role it plays in making decisions in the enterprise. Effective decisions can be taken as to where the cash is being used or whether any cash is being blocked unnecessarily in fixed assets whereas there is no cash for carrying out the operations. Due to its role in decision making and helping the management in taking the important decisions it have gained importance over a short period of time.

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