The imperfect standard: why all cashflow statements still aren't created equal.

Summary

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Cash flow statements are extremely important since they indicate a particular organization's ability to generate favorable cash flows. Financial Accounting Standard number 95 (FAS 95) provides accountants with a standardized format for the preparation and presentation of cash flow statements. However, the FAS 95 definition of cash flow activity sections allows some items to be classified under several headings. As a result, FAS 95 falls short of the level of comparability it was designed to achieve.

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The imperfect standard: why all cashflow statements still aren't created equal.

The importance of cash flow information to financial statement users is acknowledged in Statement of Financial Accounting Concept Statement No. 1 (SFAC 1), Objectives of Financial Reporting by Business Enterprises. In that Statement, the Board stated:

"Potential users of financial information most directly concerned with a particular business enterprise are generally interested in its ability to generate favorable cash flows because their decisions relate to amounts, timing and uncertainties of expected cash flows."

In SFAC 5, Recognition and Measurement in Financial Statements of Business Enterprises, the FASB recommended cash flow information be included in a full set of financial statements. These recommendations stimulated discussion regarding a cash flow statement and led to its development.

Statement of Financial Accounting Standard No. 95 (FAS 95), Sta...

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