Question

What can investors and creditors learn from the statement of cash flows that can't be learned from an income statement?

Answer 1

This is the statement of incoming and outgoing of cash through some specific activities.

Things could be learnt as below:

1) Operating activity: This is the key area of fulfilling the firm’s main objective. Cash flow or cash used in operation would be the result of operating activity. It helps creditors and investors to learn how the operation is going on – based on this learning creditor extend credit terms to the firm.

2) Investing activity: This is the area of capital expenditures, like machinery purchased, investment in other firms, etc. It gives operational facilities and learning of asset accumulation.

3) Financing activity: This is the area of capital generation, which affects directly on dividend policy of investors and the hands of control. Creditors like to know who controls the company – shareholders or lenders.