Current Attempt in Progress For external reporting

Current Attempt in Progress For external reporting, a company must prepare either an income statement or a statement of cash flows, but not both.

True

False

The correct answer and explanation is:

The correct answer is False.

Explanation:

For external reporting, companies are required to prepare both an income statement and a statement of cash flows, along with other financial statements like the balance sheet and statement of shareholders’ equity.

1. Income Statement:
   This financial statement shows a company’s financial performance over a specific period. It summarizes revenues, expenses, gains, and losses to arrive at net income or net loss. It helps stakeholders understand how profitable the company was during that period.
2. Statement of Cash Flows:
   This statement reports the actual cash inflows and outflows during the same period. It breaks down cash activities into three categories:
   • Operating activities
   • Investing activities
   • Financing activities
   The cash flow statement helps users understand how the company generates and uses cash, which is crucial because net income can include non-cash items (like depreciation) and accrual accounting adjustments.

Why Both Are Required:

• Complementary Information:
  The income statement reports profitability, while the cash flow statement reports liquidity and cash management. A company could show a profit but still have poor cash flow, which might indicate financial trouble.
• Regulatory Requirements:
  Accounting standards, such as U.S. GAAP (Generally Accepted Accounting Principles) and IFRS (International Financial Reporting Standards), require both statements to be prepared for external users. This ensures transparency and a complete financial picture.
• Stakeholder Needs:
  Investors, creditors, analysts, and other stakeholders rely on both reports to make informed decisions. The income statement alone doesn’t provide sufficient detail about cash availability or how cash is generated and spent.

Summary:

Companies must prepare both an income statement and a statement of cash flows for external reporting. They are distinct but equally important financial statements that together give a comprehensive view of a company’s financial health.