Which income statement will be more important to financial analysts- the accrual statement of cash statement?...

Which income statement will be more important to financial analysts- the accrual statement of cash statement? Why?

Expert Solution

The accrual statement will be more important. The reasons are :

Cash statement records only actual cash inflows and cash outflows as income and expenditure. It does not give a complete and accurate picture of the year's transactions
Accrual statement records prepaid and outstanding income/expenditure for the year, irrespective of how much cash is actually paid or received
Using an accrual statement, a cash flow statement can still be prepared to analyse the cash inflows/outflows during the period
Higher prepaid/outstanding income/expenditure during the year will give an inaccurate representation of the finances under the cash statement. Accrual statement would give a more accurate picture
Cash statement focuses on actual cash flows, whereas accrual statement focuses on expenses actually incurred and income actually earned
Analysis of debtors/creditors (receivables/payables) is not possible with a cash statement

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