If you only had 2 statements to assess a company’s prospects, which 2 would you use?
Answer
You would pick the Income Statement and the Balance Sheet as you can create the Cash Flow Statement from both statements assuming you have the prior period versions of both.
The key here is that you can think of the Cash Flow Statement as a synthesis of the Income Statement and the Balance Sheet, with the purpose of tracking cash.
Think about what goes into Cash Flow from Operations as an example. It starts with Net Income (Income Statement), then makes a few changes for non-cash expenses and then captures the change in Working Capital (Balance Sheet).
The Cash Flow Statement pulls everything together, and that’s why it’s the one statement you don’t need to create all three and assess a company’s prospects.
Why this matters to bankers
When you’re forecasting a Cash Flow Statement, you need to build it using the forecasted Balance Sheet and Income Statement to make sure everything ties.