2 - Review of financial statements 2: The income statement and the statement of cash flows

Abstract

This chapter discusses the income statement and cash flow statement by illustrating the financial statements of DaimlerChrysler AG. The income statement and the cash flow statement measure the flow of transactions over a period of time as distinct from the balance sheet, which reports stocks at a particular moment. It is a common practice to report two years of balance sheet data and three years of data for the income statement and the cash flow statement. The final destination on the income statement is the net income, which represents the amount by which the shareholders' equity is increased and is legally available for distribution as a dividend. The income statement thus provides an analysis of the transactions that have affected equity during the year. The statement of cash flow is similar to the income statement, which reports the results of transactions over a period as a statement of flows. The cash flow statement reports and analyzes transactions that have affected the cash account of the firm during the period under review. It is of critical importance for valuations, which focus directly on the future cash flows of the business. An additional advantage of the cash flow statement is that it avoids the effects of discretionary accounting policies, thereby, making it more comparable across companies and can sometimes be more useful than the income statement.