Question

Why is a cash flow statement considered an accurate indicator to evaluate a company? Locate financial statements for a company of your choice, and review the cash flow statement. What insights does it provides about the company’s performance, in relation to other its other financial statements?

Answer 1

Cash management is very important for an organisation’s day-to-day planning of resources. To find out the availability of cash, an organization has to make projections of their cash inflows and outflows. The analysis of past cash flows is useful to provide an analysis for future requirements. The cash flow statement is in other words a statement of changes in financial position on cash basis and it depicts the cash position between two balance sheet dates. This statement focuses on cash while the fund flow statement provides information on working capital funds. Cash flow statement is prepared on cash basis in which all inflows and outflows of cash will be recorded. This statement may be compared with the previous year’s cash and the balance will reflect whether there is any increase or decrease in cash during the year. Therefore, the final balance after adjusting the increase or decrease in cash balance in current year in comparison to cash balance of previous year will be reported in financial statements. This is the best indicator for evaluating the performance of any company with the help of cash inflow or outflow allocated in three categories like cash flow from operation, cash flow from investing, and cash flow from financing activity. It provides overall view of the operation of utilisation of cash by the organisation to track whether the organization is going towards success or not.