Question

Of the three financial statements, balance sheet, P&L, and cash flow statement, which would you consider most important for guiding your actions if you were a senior executive in an organization? Please justify your position and support it with research.

Answer 1

I think Balance Sheet is the statement that is the most important to consider first when evaluating a Company because it gives a gist of all types of significant activities that the Company is concerned with. For example, the Bottom line obtained from the Revenue statement is transferred to the Reserves or to the Stockholder’s equity, which also gets reflected into the Balance sheet. Similarly, the net change in cash forms the Cash at the beginning of the Balance sheet. Hence, it helps summarizing all types of financial activities in terms of spending or earning, thereby helping to evaluate the financial standing of the Company in the industry. A critical examination of Balance sheet statement would also help to comprehend whether the Company is undergoing a critical time or is financially sound.

However, in terms of the additional information that I think would be helpful in evaluating the financial situation of a firm apart from the above three financial statements, would be the determination of various Financial ratios such as Liquidity ratios, Debt ratios, Activity ratios, Profitability ratios, etc. These ratios add more meaning to the statements and also helps in forecasting the financial activities in a significant way. It could be used by various parties such as financial analysts, stock holders of the Company, Company’s management, etc. in order to understand the strengths and weaknesses of the Company and the financial state of the Company overall in any given industry.