InvestorQ : Why is the cash flow statement in an annual report important?
Riya Dwivedi made post

Why is the cash flow statement in an annual report important?

rhea Babu answered.
3 years ago

There is a popular saying in markets that what matters are not the profits generated but the cash flows generated. We all know that a very important component of the balance sheet is the current assets and a very important component of current assets is cash and cash equivalents. This represents the total cash available with the business which the management can allocate to various activities including new investments, expansions, diversifications, fixed asset purchase, paying dividends, buying back stock etc. All these activities have an impact on the cash of the company and breaking them up gives us unique insights into the health of the business.

Some of the biggest bankruptcies were due to the fact that the income statement glossed over but the cash flow statements still gave a hint. Take the case of Satyam! The massive implosion should have been obvious to any auditor who bothers to look at the cash flow statement. That is because the cash flow statement actually explains the reason for the difference between the cash balances between two years. Statutorily, Indian companies are required to provide a detailed cash flow statement, apart from the income statement and the balance sheet.