Question

Which of the three basic financial statements, Balance Sheet, Income Statement and Statement of Cash Flows is most informative in your opinion? Why?

Answer 1

The three financial statements – The Income statement, The Balance Sheet and the Cash Flow statement are designed as a whole, ie. an entity that can provide a complete picture of the financial condition of the business. Which statement is more important depends upon the perspective of the person.

In my opinion, the statement of Cash Flow is very informative, because it tells how much cash a business has generates which can tell you the growth of the company.

Cash Flow as compared to the income statement: The income statement is prone to errors due to accounting conventions. It only recognizes a certain amount of expenses and revenues based on the quarter, while actual cash inflow or outflow may be different. Another example, McDonald's and Burger King. If we look at the trades, Burger King is traded at a low price as compared to the former, because of the forward earnings. But looking deeper we find that Burger King uses most of its operating cash flow each year on building new restaurants i.e. capital expenditure. Therefore, actual cash flow available to the investor is less based on the income statement but cash generating capabilities are more.

Cash Flow as compare to the Balance sheet: As balance sheet is the snapshot of the assets and liabilities of the business, if you have only one balance sheet, it cannot be known that how profitable the business is each period.

Also, the answer can vary based on the perspective also, e.g. Investors analysis are based on cash flow, so they are interested in cash flow statements. Auditors audit the balance sheet, Managers are responsible for business obligations, so they are interested in Income statement etc.

Also, if we are talking about two statements of the three, then Income Statement and Balance sheet are more informative, as they provide all the necessary information and we can generate the cash flow statement using these two.