\"Statement of Cash Flows\" Please respond to the following: According to the te

Question

"Statement of Cash Flows" Please respond to the following:

According to the text, when considering an investment opportunity, some investors believe the organization’s statement of cash flows is the most important factor in evaluating the health of the organization. Others argue that the investors should not use statements of cash flows because they do not show true profitability. For example, depreciation is only considered on the income statement, not on the statement of cash flows. Take a position on whether or not you agree with investor use of statements of cash flows, and provide support for your position.

Explanation / Answer

Cash flow statement is an important measure of health of an organization because of the following reasons-

1. Income statement only present the profitability but cash position is not shown

2. A company may be profitable but may have a negative cash flow which can lead to financial crunch. This is identifiable through cash flow

3. Income statement can be manipulated but cash flow statement cannot be manipulated hence would present a true picture

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