Usefulness of Cash Flow Statements

Savita A. Sahay ()
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Savita A. Sahay: Rutgers Business School, Rutgers University

Chapter 72 in Encyclopedia of Finance, 2022, pp 1657-1683 from Springer

Abstract: Abstract This chapter aims to study the current rules regarding preparation of cash flow statements, as proscribed by Financial Accounting Standards Board (FASB) and pinpoint the problems with the current rules. The problems with the existing rules under SFAS-95 can be classified into four broad categories: problems arising from the current three-way classification of cash flows, problems due to the method chosen for preparation of cash flow statements, problems due to the ambiguities in the current rules and problems due to the loopholes in the rules that allow manipulation of cash flows. Several examples of each inconsistency and ambiguity are provided using Johnson & Johnson (JNJ) cash flow statements for 2011. We use an illustrative method to highlight the need for changes in the existing rules regarding cash flow statements. By showing that under the current rules, several cash flows get misclassified, leading to unclear and confusing financial reports, we hope to make the readers of the financial statements aware that the amounts reported as cash flow from operating, investing, and financing activities do not reflect all of the cash consequences of these activities and that the reported amounts should not be used in decision models without adjustment. We also hope that the FASB will be persuaded to amend SFAS-95 to eliminate the ambiguities and conform more closely to the finance literature, so that the information in the cash flow statement becomes more useful to report users. Since a primary objective of financial reporting is to provide information to help accounting users assess the amount and timing of future cash flow and earnings, removing some of the ambiguities and other improvements suggested in the paper will not only make these statements more useful in credit and investment decisions, it will also lead to an increased usefulness of financial ratios which currently use information from the cash flow statements, such as operating cash flow, in either the numerator or denominator.

Keywords: Cash classification ambiguities; Cash flow statement; Existing rules; Financial ratios; Manipulation; SFAS-95 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-030-91231-4_72

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DOI: 10.1007/978-3-030-91231-4_72

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