IDEAS home Printed from https://ideas.repec.org/h/spr/sprchp/978-3-030-91231-4_72.html
   My bibliography  Save this book chapter

Usefulness of Cash Flow Statements

In: Encyclopedia of Finance

Author

Listed:
  • Savita A. Sahay

    (Rutgers Business School, Rutgers University)

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.

Suggested Citation

  • Savita A. Sahay, 2022. "Usefulness of Cash Flow Statements," Springer Books, in: Cheng-Few Lee & Alice C. Lee (ed.), Encyclopedia of Finance, edition 0, chapter 72, pages 1657-1683, Springer.
    • Handle: RePEc:spr:sprchp:978-3-030-91231-4_72
    DOI: 10.1007/978-3-030-91231-4_72
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:sprchp:978-3-030-91231-4_72. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.