Financial decisions often place heavier emphasis on one type of financial statement over the others. Consider each of the following hypothetical situations independently.
(a) An investor is considering purchasing common stock of the Bally Total Fitness company. The investor plans to hold the investment for at least 3 years.
(b) Boeing is considering extending credit to a new customer. The terms of the credit would require the customer to pay within 60 days of receipt of goods.
(c) The president of Northwest Airlines is trying to determine whether the company is generating enough cash to increase the amount of dividends paid to investors in this and future years, and still have enough cash to buy new flight equipment as it is needed.
(d) Bank of America is considering extending a loan to a small company. The company would be required to make interest payments at the end of each year for 5 years, and to repay the loan at the end of the fifth year.
Instructions
In each of the situations above, state whether the decision maker would be most likely to place primary emphasis on information provided by the income statement, balance sheet, or statement of cash flows. In each case, provide a brief justification for your choice. Choose only one financial statement in each case.