Chapter 13—STATEMENTS OF CASH FLOWSthat is contracting, the relationships will largely run in reverse. Ingram and Lee's statisti-cal analysis largely supported their deductive analysis.7.Discuss arguments supporting the need for improving the Statement of Cash Flows (SCF). What suggestions do Broom and the authors of the text make regarding improvement? ANSWER:Broome states that SFAS No. 95’s flexibility in allowing either the direct or the indirect method on the SCF creates confusion. Some arguments supporting the need for improving the SCF include:1.The complicated adjustments required by the indirect method are hard for a reader to understand and provide managers more leeway for manipulation.2.The flexibility in classification between the three sections of the SCF can affect the perception of the firm’s financial strength.3.Flexibility in allowing either the direct or indirect method creates confusion.Broom makes the following suggestions:1.FASB require both the direct method andthe associated reconciliation of net income to operating cash flow for the operating section. 2.FASB should provide more quittance on classification of cash flows for the three sections.3.The supplementary reconciliation should begin with cash flow from operations and proceed to net income, the reverse of the current practice. Wolk, Dodd and Rozycki agree that the direct method should be required, but argue that firms should explain the source of any nonarticulation that occurs in the operating section of the SCF. They suggest firms be required to provide a schedule showing the noncash flow transactions that affect working capital accounts, allowing the user to understand the differences between balance sheet changes and the SCF. They also suggest that, in the case of mid-year acquisitions, firms should provide a schedule that reconciles the working capital adjustment in the operating section of the SCF with the respective balance sheet changes. Accounting Theory: 8theditionPage 10 of 10
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