Global Journal of Management and Business Research, A: Administration and Management, Volume 22 Issue 8

Beyond the considerations regarding the difficulty an outside operator encounters in calculating cash flow or earnings management flow and imagining that companies voluntarily provide such an aggregate, the question must ask whether knowledge of this aggregate can replace the requirement to prepare the complete statement. The answer is negative because, although it may give the characteristic monetary cash flow essential relevance, dynamic financial analysis requires the judgment of the company's situation based on verifying the balance between sources and recurrent needs. Only a thoughtful balance between income and expenditure that tend to recur periodically in the business environment can ensure financial stability for the enterprise. Knowledge of the mere monetary characteristic of cash flow does not allow such an analysis. It is conceivable that, even with a significant cash flow, the financial dynamics show a set of recurring needs (e.g., taxes, finance charges, payment of severance pay, repayment of financial loan instalments, etc.) such as to make the above aggregate, insufficient to guarantee balance and solidity to the company. Such a situation would be created even if the external operator owns only the flow deriving from income management (as per IAS 7 and principle OIC 10). In this case, since some recurring values are included in determining the flow, the abovementioned problem might be less disruptive. Unfortunately, however, even in this hypothesis, the mere knowledge of this flow would not allow, in any case, to judge the enterprise's ability to meet recurrent needs with sources marked by similar time characteristics. The assessment of creditworthiness, therefore, inescapably requires the analysis of the complete statement referring to the period under investigation. It is unnecessary to dwell on this to understand how those outside the companies prevent the drafting of such a document. Regardless of the formal structure chosen, the statement's drafting requires knowledge of information known only to corporate management. Even in this case, it is not possible to rule out the possibility that an external party would be able to draw up a complete statement since; theoretically, it is conceivable that, for example, the report of the notes to financial statements the management report would contain a range of information, provided for in the code, that would allow the determination of all cash flows. If it could prepare such a statement based on the data that can be drawn from the published financial reporting publicly available, there would be no need to question whether the report should be compulsorily prepared/disseminated. Such a consideration reflects mere wishful thinking, far from the practice followed by companies. And this is evidenced, quite clearly, precisely by the doctrinal and legal debate concerning the advisability of including the statement among the documents with compulsory dissemination. Therefore, the assessment of creditworthiness cannot disregard the requirement of drafting the cash flow statement, otherwise is the possibility of making wrong decisions regarding the company's ability to repay its debts regularly. In conclusion, it seems appropriate to emphasize that the assessment of creditworthiness implemented based on mere actual values identifies a hazardous operation. These planned values need to be set out in the general business budget to place the analyst in a position to determine prospective ratios and flows. Indeed, the prospects of the company appear to be a fundamental element of knowledge so that the decisions of potential and/or existing lenders are harmonious concerning the actual conditions of the companies being evaluated. To understand the relevance of the cash flow statement in the context of creditworthiness assessment, assume that a firm, at the request of lenders, in year N, provides an income and equity budget for year N+1, which shows an excellent static income and financial situation: Economic Budget: Sales revenues 18.400 Total characteristic revenues 18.400 Depreciation and amortization 530 Opening inventoriesfinishedgoods 400 Wages and contributions 1.600 Trade costs 280 Depreciation costs 1.300 Ind.costs 4.500 Miscellaneouscharacteristic costs 1.500 severancepay 160 Rawmaterialpurchases 6.193 Financial Reporting Destined to External Third Parties as a Tool for Analyzing Credit Worthiness: Usefulness and Limitations. The Italian Case Global Journal of Management and Business Research Volume XXII Issue VIII Version I Year 2022 ( ) A © 2022 Global Journals 99