Managers are able to see the financial operations going on in an organization through the financial statements prepared in accordance to the financial accounting standards. Among the financial statements prepared, the statement of cash flows is one of them and the managers are very interested in it. Investors interested in a company look at statement of cash flows to see how efficiently cash is managed and it is usefulness in evaluating financial policies and cash position of the business. It also discloses the movement of cash and shows the success or failure of cash planning.
Originally, businesses were required to file a statement of changes in financial position, or a funds statement. In 1961, Accounting Research Study No. 2, sponsored by the American Institute of Certified Public Accountants (AICPA), recommended that a funds statement be included with the income statement and balance sheet in annual reports to ...
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...n, if material, must be disclosed in the financial statements so that readers can understand the nature of the transaction and make necessary adjustments when analyzing the corporation 's performance. (sec.gov)
Based on the above financial reporting scandals it shows that this basic financial statement (Statement of cash flows) is in need of reform. The direct method for reporting cash flow from operations is recommended by FASB, together with an improved reconciliation of operating cash flow to net income. More than 90 percent of corporate statements of cash flow use the permissible indirect method. Analysts always believed that the statement of cash flows cannot be manipulated by company managers if it is prepared in accordance with generally accepted accounting principles. But from the above scandals it shows otherwise and calls for the need to reform FASB rules.
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