Understanding the Statement of Cash Flows and Profitability Analysis

Understanding the Statement of Cash Flows and Profitability Analysis Student’s name Department: University Course: Course Code Instructor’s name Date Understanding the Statement of Cash Flows and Profitability Analysis 1. The chapter demonstrates how to prepare a statement of cash flows from information on the balance sheet and income statement. If this is possible, why must managers provide a statement of cash flows? What does the statement of cash flow tell you that the income statement and balance sheet do not? Managers need to present a statement of cash flows because it contains information different from that found on the income statement and balance sheet. While income statements represent profitability and balance sheets portray the firm's financial position, the statement of cash flows portrays actual cash generated and spent, which is far more valuable in undertaking cash-based evaluations of firms' liquidity and overall financial health. It includes cash from operating, investing, and financing activities, which the shareholders and investors use to assess the firm's operation and continuity. While accrual-based income is more general and logical, cash flow data reflect the timing and identification of cash flows and the likelihood of the company's ability to finance costs and fund new investments (Wahlen 2023 a). 2. Common-size analysis is a simple way to ...