The financial statement that is most important to investors is the income statement. This statement shows the financial performance of a company over a specific period. However, the other two second most important financial statements are the balance sheet and the cash flow statement. Each of the financial statements has its proponents, and the one that deserves the most weight relies on the important circumstances of the end user.
Below, we’ll highlight the most important financial statements and why it is so crucial.
Hey dear, this part is the most important part where you will understand the reason why the most important capital statement is so much needed and also so crucial.
Also read: Which Financing Option has the Highest Overall Costs?
Most readers will place the most weight on the income statement because it provides insight into a company’s profitability. In addition, the majority of the income statement’s monetary amounts are fairly up-to-date, indicating a high degree of accuracy. However, it does not show how much money is needed in assets and liabilities to make a profit, and its results do not always correspond to the cash flows that the business actually has. When using the accural basis of accounting, there is further cause for concern about the veracity of this document. This means that the income statement, by itself, can be deceptive.
Since the balance statement does not divulge the results of operations, and some of the data stated in it may be based on historical costs, making the report less informative, it is likely to be placed third by many users. However, when combined with the income statement, the balance sheet becomes extremely useful since it shows how much capital is required to sustain the sales and profits displayed on the statement.
Financial Cash Flow Statement
The statement of cash flows is one of the most important financial reports since it details the cash coming in and going out of the statement. When the accrual basis of accounting is used, the income statement may not give an accurate picture of cash inflows and outflows, but this report will.
There Are a Few Other Variations
Another approach to frame the inquiry is to ask which two of the statements are the most informative. Given that the statement of cash flows can be derived from the income statement and balance sheet, those two reports would be optimal. Another spin on this idea is to use the user’s point of view to determine the most important statement. Case in point:
The view of an auditor. The balance sheet is the most important document in the eyes of the auditor because it is the subject of the audit.
the point of view of an investor. The statement of cash flows will be of the most important to investors because their analysis of share value is predicated on it.
In the eyes of the law. Before filing a lawsuit against a firm, a potential plaintiff should study the company’s balance statement to see if there are sufficient assets to seize upon a verdict in favor of the plaintiff. If that’s not the case, going to court is just not worth the expense.
The view from the top. Managers are the ones tasked with making the finer adjustments to the company, thus they will most likely examine the income statement in great detail.