Why is the statement of cash flow important to investors?

Question:

Why is the statement of cash flow important to investors?

Financial Statements

Financial statements of a company give a true and fair view of the company's financial position to its shareholders, investors or any other bodies when required. Financial statement of companies include:

  • a balance sheet for the financial year of the company
  • Profit and loss statement of a company and income and expenditure account for non-profit organizations
  • Cash flow statement for the financial year
  • Statement of changes in equity.

The main purpose of preparing a financial statement is to give a fair view of the state of affairs of the company as at the end of the financial year.

Answer and Explanation:

Cash Flow statement

Companies are evaluated based on their financial performance. When it is required to explain the management of the sources of cash and its uses during a particular period, a statement of cash flow is prepared. A statement of cash flow records the inflows(receipts) and the outflows(payments) of cash and its equivalents during a particular period. A statement of cash flow reports net cash inflow, outflow for each activity and the overall business. It also reports the reasons behind changes in cash for the company during the period.

Importance of cash flow statement to investors

Before investing in any company, an investor would like to know the financial stability of the company. For this, it will need to review the financial statements of the company. Cash flow is one of the financial statement that has below-mentioned uses for investors:

  • Shows the exact cash generated or spend during a year resulting in positive or negative cash flow. This will help investors summarize the position of a company regarding financial stability
  • Net cash from operating activities will help the investors determine the company's spending and generating income activities.
  • Net cash from financing activities will help the investors know about the company's liquidity that is checking the cash between business and its owners, creditors.
  • Net cash from financing activities will help investors with the company's strategies to generate revenue from non-current assets.

In simple words, every investor would like to invest in a company where his or her invested capital will give the best return to him/her. Cash flow statement helps them to understand or determine their profit or loss if they invest in the company.


Learn more about this topic:

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Using the Statement of Cash Flows for Decision Making

from Accounting 101: Financial Accounting

Chapter 12 / Lesson 5
7.6K

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