Question

Explain whether you agree or disagree with the following comments: “The Statement of Cash Flows is overrated. What is it really telling me that I can’t just find by looking at this year’s Balance Sheet and seeing how the account balances changed from last year?”

Answer 1

I will disagree with the statement that cash flows are overrated. Though balance sheet analysis does give a lot of information regarding the financial position, the objective of cash flow is more specific and targeted towards detailed analysis of cash flows. From an investor and analyst perspective, balance sheet will give indications of whether the companies financial position is strong and whether it is making profits. But cash flow tell them whether the profit is being converted into cash or not, and the utilisation of cash generated.

The cash flow statement clearly gives a demarcation between:

- Cash flow from operations

- Cash flows from investment activities (fixed assets, investements in subsidiaries, etc)

- Cash flows from financing activities (new debts, debt repayments, etc)

All the information, at a net movement level, is available in the balance sheet, but is elaborated in more detail, disaggregated and classified according to the source of cash flow. As theys ay, cash is king. So a company making profits through revenue accruals, may not be as attractive as a company which makes slightly less profits but converts cash at a quicker rate, as the latter will always have cash at disposal to invest in new projects and understake new ventures or expansion.

A lot of such information is made available only in the cash flow statement. Therefore, cash flow statement, though extension of the balance sheet in a way, provides insights and more details or various movements which are useful in analysing the operational health and strategic focus of the company