Usefulness of the Cash Flow Statement in Relation to the Income Statement PART 1: A. A cash flow statement records the actual movement of a company's cash flow, it shows where the cash came from and what was actually paid out during the year. The cash flow statement records the cash movements of three activities: operating, financing and investing. Operating activities adjust profit for non-cash expenses and gains as well as the change in working capital and provide the cash actually received after the operations are completed. Financing activities record the company's financing and investing activities record the capital expenditures of a company. This basically shows a company's ability to generate cash, as many businesses make a profit but fail due to their inability to meet their cash flow needs. Investors use the cash flow statement to calculate "free cash flow" which is calculated by deducting capital expenditures from net cash provided by operating activities. This shows investors how much cash is available for the company to pay its dividends. The cash flow statement is also useful to existing investors in determining where cash is being spent and to what extent it is being used (Daniel, Denis & Naveen 2010).B.• Liquidity: The liquidity of a company depends on the amount of the liquid assets it owns. , which are cash or assets that can easily be converted into cash. The cash flow statement shows how much money comes in and out of the business, so it shows how liquid a business is and how flexible it is to deal with emergencies. Working capital is an important part of cash flow analysis, it consists of current assets minus current liabilities and can help assess the liquidity of the business for the upcoming account...... middle of paper......the flexibility of the company to deal with emergencies. So, as the cash flow statement generates free cash flow, it can be said that it can be more useful for investors, however, both reports should be used to make a more reliable decision (Fight, A, 2005).REFERENCES• Daniel, N, Denis, D and Naveen, L. (2010) Sources of financial flexibility: evidence from cash flow deficits*. [Online] p.2-20. Available at: http://business.nd.edu/uploadedFiles/Faculty_and_Research/Finance• Fight, A. (ed.) (2005), Cash Flow Forecasting, Butterworth-Heinemann, London.• Sinha, G, 2009, Financial Statement Analysis, PHI learning private limited, New Delhi.• From 2014, Annual Report 2013, accessed on 04/22/2014, http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NTM3Mzk4fENoaWxkSUQ9MjI2MjMyfFR5cGU9MQ==&t=1 • Date of consultation: 04/21/2014, www.investopedia.com