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REFORMATTING THE STATEMENT OF CASH FLOWS by Kenneth E. Stone Central Missouri State University John A. Elfrink Central Missouri State University ABSTRACT The current format for the statement of cash flows has been repeatedly criticized because it is subject to inconsistent and ambiguous reporting. The primary reason for this criticism is that the classifications within the statement are not mutually exclusive. The current criticisms are likely to continue as long as the categories of operating, investing, and financing activities are used. Therefore, an alternative format for the SCF is recommended in order to improve the consistency, clarity, comparability, and quality of information presented. Advantages of the recommended format are (1) the classifications are defined so they are essentially mutually exclusive, (2) more detailed and clearer information is provided, and (3) the subheadings (categories) are consistent with the current classifications used in the income statement and balance sheet. The recommended format should better achieve the financial reporting objectives of consistent classification of transactions across financial statements and comparability with other reporting entities. INTRODUCTION The Statement of Cash Flows (SCF) has been criticized because some items do not seem to be consistently or logically reported. For example, some critics argue that payment of interest is a financing activity; however, payments for non-capitalized interest are included in cash flows from operations and cash paid for capitalized interest is included in investing activities. Therefore, interest paid may be reported under two categories, neither of which is financing activities. Also, cash dividends and interest received are included in operations instead of investing activities. Other problem areas include the reporting of cash flows from bonds sold at a premium or discount, sale- leaseback transactions, purchase and sale of rental assets, and repurchase agreements. The primary reasons for the criticism of the SCF are (1) the three categories used in the statement are not mutually exclusive, and (2) many users of the SCF want more detailed information than is provided in the current statement. If the current categories of operating, investing, and financing activities are retained, the statement of cash flows will continue to be subject to some degree of criticism. In this paper, the authors recommend a change in the format of the statement of cash 1
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flows that uses mutually exclusive categories, allows more detailed information to be provided, and closely follows current reporting in the income statement and balance sheet. . REVIEW OF RELATED LITERATURE Users of financial information are generally interested in the entity’s ability to generate favorable cash flows because decisions are based on amounts, timing, and uncertainties of expected cash flows (Thompson and Bitter 1993). They also report that SFAS No. 95, Statement of Cash Flows, was
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