The distorting effects of acquisitions and dispositions on net operating cash flow

Hugo Nurnberg

Accounting Forum, 2006, vol. 30, issue 3, 209-226

Abstract: The cash flow statement is the third principal financial statement in a corporate financial report. It presents the cash inflows and outflows for the period, together with certain net cash flow subtotals, foremost being net cash flow from operating activities (henceforth NCFO). Under the cash flow statement classification rules of both the Financial Accounting Standards Board (FASB Statement No. 95, Statement of Cash Flows, 1987, henceforth FASB-95) and the International Accounting Standards Board (IASB Standard No. 7, Statement of Cash Flows, 1992, henceforth IASB-7), NCFO may increase directly as a result of business acquisitions and dispositions (henceforth acquisitions and dispositions, respectively), although the acquisitions and dispositions themselves are ostensibly reported in the cash flow statement as investing activities. Examples from annual financial reports suggest that this potential distortion of NCFO may be substantial. In general, however, required disclosures do not make transparent these potentially distorting effects on NCFO, especially when there are many acquisitions or dispositions or the disclosures are not timely.

Date: 2006
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DOI: 10.1016/j.accfor.2006.03.002

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