Which is the Most Important Financial Statement?
The cash flow statement, income statement and balance sheet are essential financial statements. These statements are meant to be viewed as a whole, and they can show the results and financial condition of a company fully. Thus, all these statements are vital in a company and correctly generating them is crucial. Hence, if you are not sure how to do it, do not hesitate to seek help from the professionals in a bookkeeping firm in Singapore.
Each of the financial statements may be the most important in different cases. However, the final answer depends on the user’s needs. Listed below are some essential points which recommend that each financial statement is the most important:
Most users of the financial statements will think that income statement is the most important as it shows the profitability of a company (Also see Accounting – 4 Tips for Analyzing an Income Statement). Besides, most of the information on the income statement is in current dollars. Thus, this statement is quite accurate. Nevertheless, it will not show the total assets and liabilities that the company needs to earn a profit, and its result may or may not be the same as the cash flow of the company. Moreover, the accuracy of this document will be affected if the company uses the cash basis of accounting (Also see Cash vs Accrual Accounting Methods). Hence, if the users use only the income statement, it may be misleading in some occasions.
Cash flow statement
This is a statement that the user may rank it as the most important financial statements. This is because this document only concentrates on the changes in the company’s cash inflows and cash outflows. Compared to the income statement, which sometimes may show a skewed result, the cash flow statement shows a clearer picture of the cash flow of the company. This is especially so when the company mandate the accruals by using the accrual basis of accounting.
Most of the users may rank the balance sheet as the third as it does not show the outcome of the operation. The company may list some of the figures in it according to historical costs, and this makes it to be less informative. However, when the balance sheet is paired with the income statement (Also see Relationship between the Balance Sheet and Income Statement), it is quite crucial as it shows the amount of investment the company needs to support its profits and sales on its income statement.
People may also rank the financial statement according to the amount of information they can provide to them. In such a situation, balance sheet and income statement are the best choices as people can generate the cash flow statement by using them.
Another way of determining which statement is the most important is from the users’ perspective. As an instance, from the investor’s perspective, the analysis of their share value is mostly according to cash flow. Thus, investors tend to be interested in the cash flow statement. From the auditors’ perspective, the financial statement that they need to audit is the balance sheet (Also see How to Ensure Your Company’s Audit Process Goes Smoothly?), so the balance sheet is the most important to them. From the perspective of the management, as the managers need to deal with the company’s fine-tuning, they most probably will focus on the company’s income statement.