POWER OF CASH FLOW RATIOS
Article on the POWER OF CASH FLOW RATIOS.
The importance of this article is to bring to light the value and vital role cash flow statements play although often ignored by auditors and accountants. Most auditors and accountants usually focus more on the balance sheet and income statements that tend to be unfortunate because the cash flow statements offer more useful and detailed insights on financial ratios that are often needed in detecting frauds and red flags during examinations. For instance, balance sheets provide only date in time perspectives whereas cash flow statements provide activities over a continuous period of time. On the other hand, income statements provide results of operations over a period of time whereas the cash flow statement discloses other important changes in resources resulting from financing and investment activities. The cash flow statements complements the income statement and balance sheet by providing essential information through operating, investing and financing activities in the form of ratios that serve as powerful and effective analytical tools. These ratios such as the quick or current ratios show indicators the liquidity of a firm’s better than the income statement or balance sheet. This provides lenders insights of a firm’s ability to pay obligations, risks and credibility.
To conclude, using the cash flow statement is an effective tool because it reduces financial data to a concise set of key relationships that provide vital information on operations and cash management practices necessary to keep an eye on red flags and fraud such as fluctuations in financial statements relationships.
SOURCES: http://www.journalofaccountancy.com/Issues/1998/Oct/mills.htm
The importance of this article is to bring to light the value and vital role cash flow statements play although often ignored by auditors and accountants. Most auditors and accountants usually focus more on the balance sheet and income statements that tend to be unfortunate because the cash flow statements offer more useful and detailed insights on financial ratios that are often needed in detecting frauds and red flags during examinations. For instance, balance sheets provide only date in time perspectives whereas cash flow statements provide activities over a continuous period of time. On the other hand, income statements provide results of operations over a period of time whereas the cash flow statement discloses other important changes in resources resulting from financing and investment activities. The cash flow statements complements the income statement and balance sheet by providing essential information through operating, investing and financing activities in the form of ratios that serve as powerful and effective analytical tools. These ratios such as the quick or current ratios show indicators the liquidity of a firm’s better than the income statement or balance sheet. This provides lenders insights of a firm’s ability to pay obligations, risks and credibility.
To conclude, using the cash flow statement is an effective tool because it reduces financial data to a concise set of key relationships that provide vital information on operations and cash management practices necessary to keep an eye on red flags and fraud such as fluctuations in financial statements relationships.
SOURCES: http://www.journalofaccountancy.com/Issues/1998/Oct/mills.htm