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In: Finance

Cash flow and net income are both important. If the cash flows are ignored, a company...

Cash flow and net income are both important. If the cash flows are ignored, a company could miss that they are cash poor and unable to attain business strategies and improvements that could end the business. If net income were ignored, it would also mean the main driver for stock prices could be overlooked and this could also be very harmful for a company.

What does everyone think about this statement? Do you agree or disagree?

Solutions

Expert Solution

I agree with the statement. Both cash flow statement and net income statement are important indicators of the performance of the business. The net income statement is important because it gives an idea about the actual profitability of the business. It considers the revenues from all sources irrespective of whether they have been received in cash or not. Similarly it considers the expenses from all different sources irrespective of whether actual payment has been made for them. Hence it gives the true profit making capacity of the business. It allows the analysts to analyze the profitability of the business with the help of Mia’s ratios such as operating profit ratio, interest coverage ratio and net income ratio.

The cash flow statement on the other hand gives an idea about the actual cash flows of the business. It displays the actual cash receipts and the actual cash payments which allows the analysts to analyze liquidity position of the business and to determine the actual cash flow.


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