IM_CH_13 - Chapter 13: Statement of Cash Flows Instructor's...

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Chapter 13: Statement of Cash Flows Instructor’s Manual 7 th edition Page 1 of 17 C HAPTER H IGHLIGHTS Even though SFAS No. 95 replaced the statement of change in financial position with the cash flow statement, Chapter 13 begins with a discussion of funds flow reporting and the statement of change in financial position. There are two reasons for retaining this historical literature in the text. First, the rationale for funds reporting is very similar to that for cash flow reporting—a concern that accrual accounting masks the firm’s operating flows. Therefore, funds reporting was viewed as a supplement to accrual-based statements, and the reporting of more basic funds flow data thus reverses—at least to some extent—the effects of arbitrary allocations and other conventions of historical costing. Second, the cash flow statement can be viewed as a statement of change in financial position, with “funds” defined as cash. While there are some differences in format, the point remains that SFAS No. 95 can be characterized as amending APB Opinion No. 19 by requiring rigid uniformity in the definition of funds as cash plus cash equivalents. The statement of change in financial position (SCFP) is another way of classifying and reporting the firm’s transactions that already appear in the income statement and balance sheet, but with the emphasis on undoing at least some of the effects of accrual accounting in order to get at a more basic measure of flows. The research that has been done supports the notion that a cash definition of “funds” results in the newest information—over and above the accrual data in the balance sheet and income statement. In addition, using a cash definition of funds can also be viewed as being in line with the objective of “predicting, comparing, and evaluating cash flows.” Finally, it should be emphasized that the FASB’s rigid uniformity here is well placed and that, for measuring liquidity, a cash definition of funds is the most representationally faithful. While the SCFP used a very general sources and uses framework, focusing mechanically on the narrow accounting debit-credit relation, the SCF classifies cash receipts and payments into more meaningful categories relating to operating, financing, and investing activities. Cash is defined as literal cash on hand or on demand deposits, plus cash equivalents. There have been questions raised, however, relative to the classification of interest and dividends under SFAS No. 95. In fact, three of the seven members of the FASB dissented from the statement, arguing that interest and dividends received arise from investing activities rather than from operating activities, and that interest paid is an element of financing activities rather than an operating cost. SFAS 95
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IM_CH_13 - Chapter 13: Statement of Cash Flows Instructor's...

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