Preliminary communication
THE IMPORTANCE OF CASH FLOW AS QUALITY INDICATOR OF ENTREPRENEURIAL SUCCESS
Aljoša Šestanović
; Visoka škola za ekonomiju, poduzetništvo i upravljanje „Nikola Šubić Zrinski“, Zagreb, Hrvatska
Jurica Vukas
; Zagrebačka škola ekonomije i managementa, Zagreb, Hrvatska
Marijana Stojanović
; Hrvatsko mirovinsko investicijsko društvo d.o.o., Zagreb, Hrvatska
Abstract
There are two key accounting principles in recording business transactions. Under the cash flow principle, revenues, expenses and other transactions are not recognized until cash is actually received or paid. Under the accrual method (accrual basis), which is nowadays widely accepted accounting principle, performance and position of a company is measu¬red by recognizing economic events regardless of when cash transactions occur. Accrual basis of accounting thus allows the current cash inflows and outflows information to be combined with information about future expected cash inflows and outflows in order to acquire a more reliable picture of a company’s current financial position. Accrual accoun¬ting and accounting standards allow to certain degree for companies to choose (among available options) accounting treatment of transactions. Thus certain accounting records may not reflect true economic substance of transactions allowing earnings to be presented in opposite to its economic reality. Recognizing this opportunity for companies, in the last decade investors have increasingly turned their attention to cash flow statement as a valu¬able source in evaluating quality of earnings. While this can be a wise step, investors must be particularly careful. Management employed creative ways as well to artificially inflate reported cash flow from operations. Cash flow from operations is a key indicator investors rely upon to assess both a company’s ability to generate cash and its quality of earnings. This article enlightens importance of cash flow statement and discusses certain classifica¬tion issues in creating cash flow statement.
Keywords
cash flow; financial indicators; earnings quality
Hrčak ID:
144519
URI
Publication date:
9.9.2015.
Visits: 9.361 *