Which of the primary financial statements is the most significant?
The financial statements of any company are highly significant as they contain the financial information required by the creditors and the investors to be used for the evaluation of the financial performance of the company. These statements are also important for the management as it is the way they communicate with all the stakeholders of the organization (Goldwater & Fogarty, 2011). The primary financial statements include the Income Statement, Balance Sheet, Cash Flow Statement and the Statement of Owner’s Equity. It is a general belief that the income statement must be the most important one as it contains all those metrics that the owner’s may be interested in but it is not the case (Zack, 2013).
Though each is important in its own respect, I believe, it is the Cash Flow Statement which holds the greater significance. Actually, this statement tends to describe the flow of cash both in and out of the business (Faurescu, 2012). Cash is believed to be the fuel or the blood of the organization and therefore its flow is the most important; not only is the management and owners interested in this statement but it is also critical for the investors who have to analyze the current situation of the company. The investors can easily gain information from this statement whether the company has enough cash to cover all the expenses and to make the purchases of assets or not (Zack, 2013).
The profit that is reported in the income statement contains the non-cash elements and misleads the reader as all the information mentioned has no direct link with the cash exchange of the company. The fact is that all the cash that flows either in and out of the company is incurred from non-operating activities that are not included in any statement apart from the cash flow statement (Goldwater & Fogarty, 2011). One of the major advantages that the cash flow statement has over the balance sheet and the income statement is that it is not adjusted according to the accrual accounting; this means that those transactions that do not directly affect the cash are adjusted out. With this statement, the investors have clear understanding of the operations of the business (Faurescu, 2012). This is the only statement that has no misleading information; it simply helps to make the decision by looking at the consistency of the cash being generated (Zack, 2013).
References
Faurescu, S. F. (2012). The importance of analyzing the financial position with cash flow statement. E-journal of doctoral research (e-jdr, craiova), 1 (4).
Goldwater, P. M. & Fogarty, T. J. (2011). Cash flow decision making and financial accounting presentation: a computerized experiment. Journal of applied business research (jabr), 11 (3), pp. 16--29.
Zack, G. M. (2013). Financial statement analysis. Financial statement fraud: strategies for detection and investigation, pp. 209--213.
