Cash flow statements are the most important source of information for the purpose of analysis of the economic performance of the company. The cash flow statement shows the net inflow or outflow of cash from an organization. A cash flow statement gives information about:
a. Company’s cash receipts and payments during the year;
b. Company’s operating, investing, and financing activities; and
c. The impact of accrual accounting on the events of cash flow.
For the purpose of analysis, the cash flow statement is considered a more informative source in comparison to the income statement and balance sheet because the other two statements are primarily based upon accrual-based accounting. The accrual-based accounting is mainly based on matching principles, thus, it shows only the accounting figure of profits and others. However, the cash flow statement depicts the real economic inflows and outflows of cash and cash equivalents. It shows the real results (not the estimated and judgment-based figures) of operating, investing, and financing activities. And, from the point of view of analysts, for all the important judgment and decision-making like capital budgeting, etc., the figures of real cash flow are important.
Cash flow statements also help in determining the following:
a. Whether the ordinary operations of the business generate enough cash for it to sustain;
b. Whether there is enough liquidity and solvency to meet its debt obligations as they become due;
c. That if the firm is going to need additional financing;
d. That if the firm has enough cash to meet the additional (extraordinary) obligations; and
e. If the firm has enough capacity to take advantage of new business opportunities as and when they arise.