Cash Flow Statement

Topics: Balance sheet, Cash flow statement, Income statement Pages: 11 (3707 words) Published: October 13, 2012
In financial accounting, a cash flow statement, also known as statement of cash flows or funds flow statement is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities. The primary purpose of a statement of cash flows is to provide relevant information about the cash receipts and cash payments of an enterprise during a period. Essentially, the cash flow statement is concerned with the flow of cash in and cash out of the business. The statement captures both the current operating results and the accompanying changes in the balance sheet. As an analytical tool, the statement of cash flows is useful in determining the short-term viability of a company, particularly its ability to pay bills. In the United States, SFAS 95, Statement of Cash Flows, establishes standards for providing a statement of cash flows in general-purpose financial statements. This statement supersedes APB Opinion No.19, Reporting Changes in Financial position, and requires a business enterprise to provide a statement of cash flows in place of a statement of changes in financial position. It also requires that specified information about noncash investing and financing transactions and other events be provided separately.

Background and History
In 1971, the APB issued Opinion No. 19 officially requiring that a funds statement be included as one of the three primary financial statements in annual reports to shareholders and that it is covered by the auditor’s report. Opinion No. 19 did not specify a single definition or concept of funds or a required format for the statement. This statement was called the statement of changes in financial position. Problems with the SCFP were the fact that it had not made clear the primary categories of cash flow activities, the SCFP could be prepared with either cash or working capital, and the term "cash" had never been defined. During the early 1980s, the Financial Executives Institute (FEI) encouraged its members to adopt a cash emphasis in their statements of changes in financial position. In 1980, only 10% of the Fortune 500 companies used a cash focus; the other 90% reported net changes in working capital. By 1985, 70% used a cash focus. During this same period, the FASB issued Statement of Financial Accounting Concepts No. 5, which suggested that, conceptually, a cash flow statement should be part of a full set of financial statements. In late 1987, the FASB issued Statement No. 95, which superseded APB Opinion No. 19. Instead of allowing various definitions of funds, such as cash or working capital, and a variety of formats, the FASB called for a statement of cash flows to replace the more general statement of changes in financial position. With the development and publication of SFAS 95, the primary categories of cash flow are defined as operating, investing and financing activities. SFAS 95 also defined cash to include cash equivalents with maturities of 90 days or less, such as treasury bills, commercial paper and money market funds

Compelling Reasons for requiring a statement of Cash Flow:

* Information provided:
The statement of cash flows can provide the information that other financial statements can’t provide. The other financial statements such as Balance Sheet, which represents the company’s financial condition at a specific point in time, the Income Statement, which presents the results of operations, i.e. profit or loss, for a specific period of time, and the Statement of Owners' Equity, which details the changes in the value of the owners' stake in the company. In accrual accounting, these other documents are based on when transactions took place, rather than when cash changed hands. The Statement of Cash Flows provides the data on what happened from a cash perspective. They present relevant information about the cash receipts and cash...

References: 1. Financial Accounting Standards Board, 1987, SFAS 95, Statement of Cash Flows
2. Financial Accounting Standards Board, 1984. Concepts Statement No. 5, Recognition and Measurement in Financial Statements of Business Enterprises
3. Hugo Nurnberg, October 2006, Perspective on the cash flow statement Under FASB statement No. 95
4. Diane Murphy, Jan 2007, A History and Overview of the Statement of Cash Flows
5. Lea Miller, June 27, 2010, Understanding the usefulness of a cash flow statement
6. Neil S. Weiss and James G.S. Yang, March 2007, The cash flow statement: Problems with the Current Rules
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