Why Supplemental Disclosure of Cash Flow Information is Critical for Investors
As an investor, you are constantly seeking information that can help you make informed decisions that can lead to better returns. One critical piece of information that investors should pay close attention to is cash flow information. Companies use cash flow information to determine how much cash is coming in and going out of their business. This information can provide valuable insights into a company’s financial health and ability to make future investments.
However, the information disclosed in a company’s financial statements may not always provide a complete picture of their cash flow situation. Supplemental disclosure of cash flow information provides investors with additional key details that can help them better understand a company’s cash flow performance.
What is Supplemental Disclosure of Cash Flow Information?
Supplemental cash flow disclosure is additional information provided by companies in their financial reports that clarify the details of their cash flow activities. These disclosures provide investors with a more comprehensive understanding of a company’s cash flow performance.
Why is Supplemental Disclosure Important for Investors?
Supplemental disclosure of cash flow information is essential for investors as it provides them with a detailed analysis of a company’s cash flows. It clarifies areas that may be misleading in standard financial statements and compares cash flow data from previous years or quarters. This kind of disclosure assists investors in making sound investment choices and diversifying their portfolios.
For instance, to get a clear idea of a company’s cash flows, investors may use ratios like the free cash flow ratio, cash conversion cycle, discounted cash flow, and other cash-related ratios. If a company’s financial statements fail to provide sufficient information to compute these ratios, investors may resort to supplemental disclosure of cash flow information.
Examples of Supplemental Disclosure of Cash Flow Information
Here are some examples of supplemental cash flow disclosures that companies can provide:
1. Non-Cash Transactions: Companies often use non-cash transactions to acquire and dispose of assets, which may not be evident from the cash-flow statement. Disclosing these non-cash activities can help investors better understand a company’s cash performance.
2. Reconciliation of Net Income to Cash: Companies can provide a reconciliation statement indicating how net income was derived from changes in working capital, non-cash expenses, and other adjustments. This can help investors understand how the company’s net profit affected its cash flows.
3. Changes in Significant Balance Sheet Items: Balance sheet items like accounts receivable, inventory, and accounts payable can impact a company’s cash flow. Therefore, companies can disclose trends in these balances to help investors understand how a company’s underlying business is performing.
Conclusion
In conclusion, supplemental disclosure of cash flow information is a valuable tool for investors as it provides additional insights into a company’s cash flow performance. It complements the already available financial information and is critical for investors to make informed decisions. By understanding a company’s cash flow better, investors can distinguish between a good and a poor investment, thus minimize investment risk. Companies can use supplemental cash flow disclosures to provide investors with detailed cash flow information that cannot be otherwise recognized from financial statements to attract investors.
