What’s the most important financial statement?
Originally shared on LinkedIn.
A prominent “get a job on Wall Street” guide asks: “What’s the most important financial statement?” The provided answer:
The cash flow statement is the most important single statement because it tells you how much cash a company is generating. The income statement is misleading because it includes non-cash revenue and expenses and excludes cash spending such as capital expenditures.
Hmm. One approach to answering this question might adapt the research design of Ball and Brown (1968). That paper essentially asked whether one would earn abnormal returns by having access to earnings news one year in advance. Answer: Yes.
The “get a job on Wall Street” guide might suggest we’d rather have information on the cash flow statement instead. But if you worked through the chapter in Empirical Research in Accounting on Ball and Brown (1968), you’d see that you’d do better with the income statement data under this research design. The solutions are available here as an updated PDF, with an HTML version. The notes version incorporates corrections and clarifications made since the original post.
The Ball and Brown (1968) chapter in Empirical Research in Accounting: Tools and Methods: