Question

It has been said that operating managers focus primarily on the income statement while financial managers focus primarily on the balance sheet. And some say the cash flow statement is the most important of these financial statements. What do you think? Do you think one is more important than the others? If so, which one and why? On the other end of the spectrum do you feel that all are equally important? Somewhere in between? Your rationale for your choice should include your own thinking - don't merely post something you read in the book, though certainly you can use that to help you. Also, be sure that your post touches on all 3 financial statements.

Answer 1

There are three basic financial statements as given below

·         First is income statement or profit & loss account which is basically prepared for a period of time and shows the revenues earned and expenses incurred and if any profit or loss generated for the accounting period it is generated

·         Second statement is balance sheet , which basically shows as on date the amount of assets and liabilities the firm is having

·         Third is cash flow statement prepared for a period of time which provides details how the firm generated cash and utilized the cash

In my view all three statements are important. If we have look at the growth of the firm then all three statements have to be analyzed in conjunction.

The information provided in all these financial statements are analyzed by both internal stakeholders and external stakeholders, let us analyse the consumption patterns of information by stakeholders of the firm

·         For supplier of capital like banks, financial institutions, PE investors, shareholders they are more focused on the risk –return profile of the firm. they analyse all the financial statements to find out risk they are exposed in investing and the returns they will get on their investment

·         Suppliers to the firm on credit are analyzing whether they will get their money on time. They analyse the income statement to determine if the profit is generated and balance sheet by analyzing current ratio and quick ratio

·         The customers also analyse financial statements to see the firm can survive long term and provide after sales service to the products

·         The regulatory authorities like tax authorities analyse the income statements to determine the taxable income as tax is paid on taxable income

·         The internal stakeholders analyse the financial statements to identify any problems and take corrective actions