Showing papers on "Cash flow statement published in 1991"

A Test of the Free Cash Flow Hypothesis: The Case of Bidder Returns

Abstract: The free cash flow hypothesis advanced by Jensen (1988) states that managers endowed with free cash flow will invest it in negative net present value (NPV) projects rather than pay it out to shareholders. Jensen defines free cash flow as cash flow left after the firm has invested in all available positive NPV projects. In this paper, we test this hypothesis on a sample of large investments made by firms, namely decisions to acquire control of other firms through tender offers.

Optimal Financial Instruments

Abstract: Debt and equity are developed as optimal financial instruments in a model where cash flows and control rights are allocated to investors endogenously. When investment decisions must be made by a single party, the debtholder's cash flows are fixed in order to provide the equityholder with efficient incentives for investment. Ownership of control may be transferred to the debtholder to attenuate the impact of asymmetric information, concerning the investment opportunity, on the efficiency of the decision making. SINCE THE CLASSIC ARTICLE by Modigliani and Miller (1958), a great deal of attention has been focused on the problem of determining the optimal capital structure of the firm. Spanning, taxes and/or transaction cost, agency cost, and signalling arguments have been offered as explanations for why a firm's cash flows might be split between debt and equity claimants in a particular way. Here we address the more basic question of the optimal design of the securities that firms issue. The majority of the existing literature takes the form of the allowable financial instruments as given. In defense of this approach, it may be noted that to a first approximation firms have used two standard financial instruments, debt and equity. We argue here, however, that the characterization of the standard instruments used in much of the literature has been incomplete and that the incentives of decision makers within the firm cannot be completely understood until the problem is addressed from a more basic level than is typically done. By concentrating on the cash flow characteristics of these instruments, the equally important issue of the way the standard instruments distribute the control rights of the firm has been ignored. As a consequence, the objectives in corporate decision making have been assumed rather than developed endogenously. We consider the allocation of cash flows and the distribution of control rights to optimal financial instruments in a security design problem. By considering the design of securities in this way we are able to consider the

Financial Statement Analysis: A Practitioner's Guide

Abstract: READING BETWEEN THE LINES The Adversarial Nature of Financial Reporting THE BASIC FINANCIAL STATEMENTS The Balance Sheet The Income Statement The Statement of Cash Flows FORECASTS, ANALYSIS, AND SPECIAL CASES Forecasting Financial Statements Credit Analysis Equity Analysis Special Categories of Issuers Glossary Bibliography Index

The Agency Costs of Free Cash Flow: Acquisition Activity and Equity Issues

Abstract: Michael C. Jensen argues that there are agency costs associated with free cash flow. This study extends that argument and posits that shareholders condition their valuation decisions on firms' reputations regarding free cash flow abuse. The authors test this notion by examining share price responses to equity offers, which generally exacerbate the cash flow problem, for firms differentiated by their recent acquisitive behavior. The results suggest that shareholders react more favorably to equity issue announcements if firms have acquired only assets related to their core business than to other equity issue announcements. Copyright 1991 by University of Chicago Press.

Accounting for Non-Accounting Students

Abstract: Preface Guided tour of the book Acknowledgements Publisher's acknowledgements List of Abbreviations Part 1 Introduction to accounting 1 The accounting world 2 Accounting rules and regulations Part 2 Financial accounting 3 Recording data 4 Sole trader accounts 5 Company accounts 6 Other entity accounts 7 Cash flow statements case studies Part 3 Financial reporting 8 The annual report 9 The annual accounts 10 Interpretation of accounts 11 Contemporary issues Case studies Part 4 Management Accounting 12 Foundations 13 Direct costs 14 Indirect costs 15 Budgeting 16 Standard costing 17 Contribution analysis 18 Decision making 19 Capital investment 20 Emerging issues Case studies Appendices Index

The Evolution of Buyout Pricing and Financial Structure

Abstract: This paper presents evidence on systematic changes in the pricing and financial structure of 124 large management buyouts completed between 1980 and 1989. We find that over tine (1) prices increased relative to current cash flows with no accompanying decrease in risk or increase in projected future cash flows; (2) required bank principal repayments accelerated, leading to sharply lower ratios of cash flow to total debt obligations; (3) private subordinated debt was replaced by public debt while the use of strip-financing techniques declined; and (4) management teams invested a smaller fraction of their net worth in post-buyout equity. These patterns of buyout prices and structures suggest that based on ex ante data, one could have expected lower returns and more frequent financial distress in later buyouts. Preliminary post-buyout evidence is consistent with this interpretation.

The Hedging of an Uncertain Future Foreign Currency Cash Flow

Abstract: This paper derives the optimal hedge of an uncertain (unknown quantity) future foreign currency cash flow. This more general optimal hedge includes the traditional hedge for a certain (known quantity) future foreign currency cash flow as a special case. The optimal hedge is found to be unbounded and determined by firm-specific conditions, including the variance of the expected cash flow, and the correlation of that future cash flow with actual exchange rate movements. Simulated optimal hedge values are found for U.S.-based multinational firms possessing S/Dm cash flows, using exchange rate data for the 1981–1987 period. Special cases in which the optimal hedge ratio equals zero and one also are identified, and we show that cash flow uncertainty can strongly affect the effectiveness of hedging.

U.S. accounting: a national emergency

Abstract: The U.S. financial accounting model is important to the country's national competitiveness. The model, however, is broken and needs to be fixed. Its periodic, historical, cost-basis financial statements served the bygone industrial era well but are not sufficient for evaluating information-era companies. Worse, they discourage companies from departing from the obsolete industrial era while competitors (principally Japan and Germany) are not being held back. Unless the model is brought into the information era, U.S. industry will continue to be hampered by high capital costs, nasty financial surprises in the marketplace and deteriorating competitiveness. MOVING INTO THE INFORMATION TECHNOLOGY ERA Through the ages, manking has developed three fundamentally different methods of wealth creation: agriculture, industry and information technology (see exhibit 1, page) 57). As each new wealth-creation method supersedes the previous one, more sophisticated accounting information is required. Information technology permits leading companies to become more competitive by * Getting closer to their customers. * Improving the quality of goods and services supplied. * Providing a greater variety of product offerings. * Cutting their product design and production cycle times. * Downsizing and operating as truly global enterprises. All products and services--and the means to produce them--are becoming more information-intensive. An automobile, for example, may contain a dozen or more computers, and computers assisted in its design and construction. Training, research and development, market studies, planning, design, advertising, internal communications and other information activities constitute an increasing proportion of the value delivered to customers. The industrial-era manager operated within a hierarchical entity, typically with separate marketing, engineering, manufacturing, sales, accounting and finance functions. Hierarchical entities can grow very large, but tend to be slow moving because the separation of functions impedes fast action. Industrial-era managers figure the "optimum" way to perform manufacturing or processing tasks and build the entity's control system to "lock in" the optimum production process. In this system, there are standard productivity rates, and variations are systematically suppressed. Management's job in an information-era company is much different. It attempts to organize as a network instead of a functional hierarchy. It no longer focuses primarily on a fixed basket of assets bequeathed by prior management (such as raw materials, finished goods and plant and equipment) and on the relatively fixed goals of production and distribution. Instead, management must focus increasingly on information assets (such as human resources, R&D, information systems, data on customers' needs and capacity for innovation) and on the shifting goals of shorter product design and production cycles, improved quality and greater customer satisfaction. U.S. ACCOUNTING MODEL: FUNDAMENTALLY INDUSTRIAL Despite new managerial tasks, accountants continue to supply the same industrial-era financial statements--statements of resources (balance sheet) and changes in resources (income and cash flow statements). Cost accounting models continue to reinforce the fixed-production-processes model. The very account-coding structure followed reinforces the hierarchy: The digits in a general ledger account-coding structure represent the levels of hierarchy--the left digits are high in the hierarchy (divisional, for example), and the right digits are low (specific activities on the factory floor). New accounting models are needed to measure rates of change in resources and processes and to account for the off-balance-sheet assets so vital to the information-era enterprise. …

Developing Ratios for Effective Cash Flow Statement Analysis

Abstract: The statement of cash flows has been a required part of annual financial statements for more than two years. While there has been considerable support for this statement since its proposal in 1986, little has been written or developed on the effective use or analysis of it. This article provides suggested ratios that can be used by financial statement users to analyze and evaluate corporate cash flows. Analysts have traditionally evaluated financial statements using financial ratios. Any text on corporate reporting or any analyst's report contains ratios comparing information from the balance sheet and income statement. These ratios are used for comparison with prior years, other companies or industry norms. To date, neither text writers nor analysts have developed ratios for effective evaluation of the statement of cash flows. Such ratios, used in conjunction with traditional balance sheet and income statement ratios, should lead to a better understanding of the financial strengths and weaknesses of the underlying entity. PURPOSE OF THE STATEMENT OF CASH FLOWS The Financial Accounting Standards Board, which issued Statement no. 95, Statement of Cash Flows, in November 1987, describes the primary purpose of the cash flow statement as providing relevant information about an enterprise's cash receipts and payments during a particular period. The FASB suggests this statement be used by investors, creditors and others to assess * An enterprise's ability to generate future positive net cash flows. * An enterprise's ability to meet its obligations and pay dividends, and its needs for external financing. * The reasons for differences between net income and associated cash receipts and payments. * The effects on an enterprise's financial position of both its cash and noncash investing and financing transactions during the period. If cash flow information is useful but unused, the logical conclusion is the business world is not analyzing available data properly. The solution is to develop tools that allow comparison of companies on a year-to-year basis and across companies. Although this article limits its approach for measuring performance to cash flow ratios, use of trend analysis and an evaluation of traditional accrual-based ratios are equally important in the analysis of financial statements. CONTENTS OF CASH FLOWS The statement of cash flows requires cash flow disclosure by the functional areas of operating, investing and financing. While cash flows from investing and financing are important components, the most scrutinized figure is likely to be cash flow from operations. While this is a key figure, it is important to consider the impact of abnormal transactions such as those related to unusual events, discontinued operations or extraordinary items it may contain. When using ratios to predict future cash flows, the inclusion of such items obviously would distort continuing cash flows and could mislead potential investors. Similar problems exist if unusual one-time transactions are included in cash flows from operations. The important point is that cash flow from operations, just like income from operations, can include a diverse mix of transactions representing a variety of unusual events. Analysis should include cash provided by normal operating activities only. This approach has been adopted when defining cash flow from operations in the ratios discussed below. ASSESSING SOLVENCY AND LIQUIDITY One objective of Statement no. 95 is the assessment of an enterprise's ability to meet its obligations and pay dividends. An analysis should determine whether the enterprise is able to generate enough cash to do this. Recommended cash flow ratios that analyze a company's ability to meet these obligations include cash interest coverage, cash debt coverage and cash dividend coverage. …

The Relationship between Earnings, Funds Flows and Cash Flows: Evidence for the UK

Abstract: Recent UK information content studies have provided evidence of a significant relationship between earnings and share prices, as in the US, but have also identified an apparent lack of information content for operating cash flow, which is in marked contrast to findings from US research. This paper provides direct evidence on the relationship between earnings, funds flows and cash flows in the UK during the period 1965–84, using tests of association and predictive tests based on a research methodology applied by Bowen, Burgstahler and Daley (1986) to US data. The results provide UK evidence on the contemporaneous and predictive relationships between measures of earnings, funds flows and cash flows which are generally consistent with the US findings of Bowen et al. and which do not support the view that earnings in the UK are superior to cash flows as predictors of future cash flows.

An Empirical Examination of Cash Flow Measures

Abstract: In recent years in the United States and Canada, there has been an increasing interest in cash flow reporting and a strengthening belief that information on cash flows is valued in the marketplace. However, little research has been devoted to the issue. Regulatory bodies in the U.S. (Financial Accounting Standards Board) and Canada(Canadian Institute of Chartered Accountants) require that an enterprise should disclose separately cash flows from operating, financing and investing activities in their cash flow statements. The data in the cash flow statements are expected to help investors assess the firm's liquidity, financial flexibility and risk. On the other hand, the British Accounting Standards Committee (ASC) does not require a statement of cash flows. This study employs a cross-sectional equity valuation model to examine the association of cash flows from operating, financing and investing activities with security prices. A sample of 403 U.S. firms is used for the ten-year period of 1976–85. The results of this study indicate that there exists a strong association between the various cash flow components included in the cash flow statements and the market value of the firm.

Introduction to accounting

Abstract: An introduction to accounting the balance sheet double entry book-keeping errors and control accounts trading profit and loss account trading profit and loss account and balance sheet - extra matters depreciation sole trader revision chapter single entry and incomplete records income and expenditure accounts for non-trading organizations partnership accounts the admission or retirement of a partner limited company accounts manufacturing accounts statements of standard accounting practice (SSAPs) cash flow forecasts cash and working capital source and application of funds reconciliation statements ratio analysis break even analysis examination preparation/revision. Appendices: answers to progress tests answers to self assessment questions.

Accounting in a Business Context

Abstract: PART ONE: FINANCIAL ACCOUNTING 1 Introduction to Accounting 2 Wealth and the Measurement of Profit 3 The Measurement of Wealth 4 The Income Statement and the Cash Flow Statement 5 Introduction to the Worksheet 6 Inventory 7 Amounts Receivable and Amounts Payable 8 Non-Current Assets, Fixed Assets, and Depreciation 9 Financing and Business Structures 10 Cash Flow Statements 11 Final Accounts and Company Accounts 12 Financial Statement Analysis PART TWO: MANAGEMENT ACCOUNTING 13 Internal Users and Internal Information 14 Planning and Control 15 Cost Behaviour and Cost-Volume-Profit Analysis 16 Accounting for Overheads and Product Costs 17 Accounting for Decision-Making: When There Are No Resource Constraints 18 Accounting for Decision-Making: Resource Constraints and Decisions Which Are Mutually Exclusive 19 Budgets 20 Investment Decisions 21 Management of Working Capital

Hospital profits, a misleading measure of financial health.

Abstract: Over the 1984-1988 period, Massachusetts hospitals complained that operating revenues, regulated by state and federal governments, were inadequate and caused significant declines in profitability. Poor profitability provided a persuasive basis for hospitals' successful lobbying for additional revenues, as well as the rationale for laying off workers and reducing unprofitable programs serving community needs. However, an alternative approach to measuring hospital financial health in the state indicates that the industry was healthy enough to significantly expand capital assets and to accumulate hundreds of millions of dollars of discretionary cash. More effective measures of financial performance are needed to inform policymakers and analysts of the financial health of hospitals. Analysis of cash flow statements provides important insights for proper interpretation of income statements and balance sheets.

The Multi-Period CAPM and the Valuation of Multi-Period Stochastic Cash Flows

Abstract: This paper develops a valuation formula for multi-period stochastic cash flows consistent with rational risk-averse investor behavior and equilibrium in securities markets. It shows that the CAPM does not have to be sequentially applied in discounting of the cash flows of multi-period projects, and a single beta can be used to measure the riskiness of an uncertain income stream. Hence, a multi-period project is priced as if it offers a single payment. The formula uses a set of assumptions that is slightly more restrictive than the minimum set Constantinides (1980) uses to produce the multi-period version of the CAPM. This paper also demonstrates that, under certain assumptions, covariances of stochastic cash flows with changes in the term structure may be sufficient measures of the cash flows' riskiness.

Monitoring Project Performance with Post-Audit Information: Cash Flow Control Charts

Abstract: An important aspect of the capital budgeting process is the post-audit, which involves (1) comparing actual results with those predicted by the decision-maker and (2) explaining why any differences occurred. When decision-makers systematically revise their uncertain initial forecasts with actual outcomes, there is a tendency for the estimates to improve. As any biases are observed and eliminated, management can improve operations and bring results and forecasts into agreement. This paper presents a post-audit method for the class of investment problems where each element of the cash flow forecast is uncertain. These problems have multiple, identical units with uncertain cash flow estimates, as found in many fleet replacement problems or in advanced manufacturing systems with multiple cells. This method graphically illustrates the uncertainty resolution that occurs, providing a means to post-audit and monitor the performance of a project through the development of Cash Flow Control Charts.

The cyclicality of cash flow and investment in U.S. manufacturing

Abstract: It is well-known that investment is the most cyclical component of GNP. In addition, the procyclicality of investment is extremely important in accounting for the "shortfalls" of GNP during downturns in the economy.' What is not well-understood is why investment is so cyclical. A number of theories have been proposed to explain the cyclicality of investment, and in this study, we bring some empirical evidence to bear on one in particular, the "cash flow" theory. The cash flow theory maintains that, because capital markets are not perfect, many firms rely heavily on internal finance for investment purposes; since cash flow tends to be very procyclical, investment also is procyclical. While the theory has been around for years, it recently has garnered renewed attention in both the financial pages of the newspaper and in academic journals. Business forecasters and analysts are particularly interested because of the current sharp decline in corporate profits and the problems in credit availability.' In the academic world, theoretical work on the imperfections in capital markets— especially asymmetric information between firms and suppliers of finance—provides support for why credit rationing may occur and why external finance may be considerably more expensive than internal finance. In addition, there has been considerable recent effort in macroeconomics to link business cycle fluctuations to fluctuations in the available internal finance of firms in the economy.' The primary aim of this study is to examine the relation between short-run fluctuations in investment and cash flow at the industry level. We build on our earlier study, Petersen and Strauss (1989), which focused on investment in the 20, two-digit Standard Industrial Classification (SIC) manufacturing industries. We found that a great deal of difference in the degree of cyclicality exists within manufacturing. In particular, we found that industries producing durable goods tended to exhibit much more cyclical investment behavior than industries producing nondurable goods. To investigate the pattern of cyclicality of cash flow and investment in manufacturing, we use data from a panel of 261 industries covering the time period 1959 to 1986. Very little attention has been given to examining investment at this level. The lack of information about industry behavior is probably due to the fact that investment studies employing firm data typically do not have enough data points to produce estimates of cyclicality across a wide range of industries. We find that cash flow is indeed more procyclical in the durable goods sector than in the nondurable goods sector. We estimate that the cash flow elasticity with respect to GNP is, on average, more than twice as great for durable goods industries as for nondurable goods industries. While we do not explore the

Accounting for business management

Abstract: 1. The accounting environment 2. The basics of financial accounting 3. The financial statements 4. Manufacturing accounts and partnerships 5. The accounts of limited companies 6. Deficiencies in historic accounts 7. Interpretation of financial statements 8. The management of working capital 9. Sources of finance 10. Cash flow forecasts and financial plans 11. Budgets - principles and preparation 12. Controlling through budgets 13. Costing 14. Pricing and cost behaviour 15. Contract accounts 16. Capital expenditure appraisal. Appendices: Alternative Companies Act accounts formats discounted cash flow (present value) tables two software applications - cash flow forecasting and budgeting solution to numerical questions.

Total Business Budgeting: A Step-by-Step Guide with Forms

Abstract: Budgeting and the Management Process. Analyzing Outside Influences. Developing Performance Targets. Budgeting Shareholder Value. Budgeting Return on Investment. Developing Budget Segments. Organizing and Administering the Budgeting Process. Budgeted Costs. Using Breakeven Analysis to Make Budget Decisions. Budgeting Shared Resources or Common Costs. Pricing. Developing the Sales Budget. Preparing Production Budgets. Preparing the Distribution Cost Budget. Preparing the Administrative Budget. Preparing the Advertising and Promotion Budget. Preparing the Research and Development Budget. Preparing the Other Income and Expense Budget. Preparing the Estimated Statement of Earnings. Preparing the Cash Budget. Preparing the Accounts Receivable Budget. Preparing the Inventory Budget. Preparing the Other Current Assets Budget. Preparing the Capital Investments Budget. Techniques for Evaluating Capital Investments. Developing the Loan Budget. Developing the Accounts Payable Budget. Developing the Other Liabilities Budget. Developing the Equity Budget. Developing the Balance Sheet Budget. Preparing the Statement of Cash Flows. Leasing. Monitoring and Controlling Budget Variances. Behavioral Implications of Budgeting. Appendix. Index.

Preparing and Presenting Statements of Cash Flows

Abstract: PREPARING AND PRESENTING STATEMENTS OF CASH FLOWS Financial Accounting Standards Board Statement no. 95, Statement of Cash Flows, specifies what cash flow information companies must report and reduces diversity in reporting. Although the standard has made cash flow statements much more understandable to financial statement users, it doesn't address some of the problems CPAs may encounter in practice. This article discusses four possible problems and solutions. NETTING AMOUNTS WITHIN STATEMENTS OF CASH FLOWS Statement no. 95 says information about gross amounts of cash receipts and payments during a period generally is more relevant than information about net amounts. In practice, some netting of cash flows occurs in preparing cash flow statements. This may or may not be appropriate, depending on the circumstances. For example, if cash proceeds from an incurred liability are used to pay off another liability, should this be treated as a refunding and thus omitted from the statement? The answer is yes if no cash is exchanged. In a pure refunding, one liability merely replaces another. If there are two separate liabilities to two separate parties, incurrence of the second liability generally should be treated as a financing inflow and payoff of the first liability considered a financing outflow. This is consistent with the FASB's stated emphasis in the standard on gross rather than net cash flows within the statement of cash flows. The operating, financing or investing activities will be obscured if inflows and outflows are not reported separately. The netting of inflows and outflows is appropriate only in three circumstances. The first is when there are exchanges between cash and cash equivalents. The second is for items characterized by quick turnover, large amounts and short maturity (paragraph 13 says items that qualify for net reporting are cash receipts and payments pertaining to (1) investments other than cash equivalents, (2) loans receivable and (3) debt, providing that the original maturity of the asset or liability is three months or less). The third is when there is an exception involving financial institutions. FASB Statement no. 104, Statement of Cash Flows - Net Reporting of Certain Cash Receipts and Cash Payments and Classification of Cash Flows from Hedging Transactions, permits banks, savings institutions and credit unions to report in a cash flow statement net cash receipts and payments for deposits placed and withdrawn, time deposits accepted and repaid, and loans made and collected. CPAs should ensure the netting of cash receipts and cash payments does not misrepresent the underlying transactions and should be careful when using a worksheet to prepare the cash flow statement. Deriving cash flow transactions merely by comparing ending balances to beginning balances in various accounts could produce an inappropriate netting of cash receipt and payment transactions. For example, a company could pay off or pay down a demand note and then reissue the note or borrow again. If it begins the year owing $100,000 on a demand note and ends the year owing $160,000, a mere comparison of worksheet balances without considering intervening transactions would indicate a financing inflow of $60,000. But what if the $160,000 ending balance occurred because the company paid back $50,000 in March and then borrowed an additional $110,000 in December? Determining net financing inflows by subtracting the beginning balance in notes payable from the ending balance would result in the statement of cash flows inappropriately netting cash receipts and payments. The company in this example should report both a financing outflow of $50,000 and a financing inflow of $110,000. BANK OVERDRAFTS The treatment of bank overdrafts is another problem encountered in preparing cash flow statements. On the balance sheet, an overdraft in a checking account must be reported as a current liability unless funds in another account in the same bank are sufficient to cover it. …

Relevance Gained: FASB Modifies Cash Flow Statement Requirements for Banks

Abstract: Fears about the the banking system permeate all levels of American society. Depositors mobbed the Bank of New England in January of this year, forcing the Federal Deposit Insurance Corporation to take over the bank. Paul Samuelson, the Nobel prizewinning economist said recently, "I didn't think I'd live to see again the day when there are actually bank runs. " An official at both the FDIC and the Resolution Trust Corporation testified before Congress that the fund which guarantees banks' deposits is under substantial stress. As never before, stakeholders in banks need sufficient, reliable information to determine a bank's financial performance. Cash flows are an important indicator of the viability of a particular bank. To survive, a bank must generate positive cash flows to meet withdrawals, liability maturities, loan commitments and to make investments. Cash flows also determine profitability. Over the life of an enterprise, profit equals cash inflows minus cash outflows. Accrual-based accounting may be too far removed from this relationship. FASB REQUIREMENTS To provide information about the cash flows of an enterprise during a particular period, Financial Accounting Standards Board Statement no. 95, Statement of Cash Flows, requires a statement of cash flows in a complete set of financial statements. Since July 15, 1988, this statement has replaced the statement of changes in financial position. FASB no. 95 contains two major reporting requirements for the statement of cash flows. One is the classification of cash receipts and payments according to the nature of the activity they represent. The other is the reporting of cash receipts and payments at "gross" with a limited amount of reporting as a net change in related balance sheet account balances. "Gross" means debit and credit transactions are reported separately. For banks, these two requirements have been amended by FASB no. 102, Statement of Cash Flows-Exemption of Certain Enterprises and Classification of Cash Flows from Certain Securities Acquired for Resale, An Amendment of FASB Statement No. 95 which addresses the classification of certain cash flows from banking transactions, and FASB no. 104, Statement of Cash Flows-Net Reporting of Certain Cash Receipts and Cash Payments and Classification of Cash Flows from Hedging Transactions, An Amendment of FASB Statement No. 95, which deals with net versus gross reporting of certain cash flows. These amendments make it easier for banks to comply with the reporting requirements of FASB no. 95 and provide relevant information about the performance of a bank to financial statement users. The purpose of this article is to review and illustrate the application of FASB nos. 95, 102 and 104 to banks. The article includes a discussion of the classification of cash receipts and cash payments for banks according to FASB nos. 95 and 102. It also explains the net and gross reporting requirements of FASB nos. 95 and 104. A comprehensive illustration of the application of all three statements is provided by showing a statement of cash flows using the spreadsheet approach. CLASSIFICATIO OF CASH RECEIPTS AND PAYMENTS FASB no. 95 requires classification of all cash receipts and payments into operating, investing and financing activities. Cash received from interest and fee income is an operating activity; cash paid for the purchase of investment securities is an investing activity; and cash received from issuing capital stock is a financing activity. This classification results in the following format for the statement of cash flows: The Bank Statement of Cash Flows Year Ended December 31, 19Xl Net cash provided by operating activities $xx Net cash used in investing activities - xx Net cash provided by financing activities xx Net increase (decrease) in cash and cash equivalents xx Cash and cash equivalents at beginning of year xx Cash and cash equivalents at end of year xx Classifying cash receipts and payments according to activities is straightforward for nonfinancial enterprises, which report buying and selling goods and services as operating activities. …

Reporting Cash Flows

Abstract: Cash flow reporting requirements for proprietary (and similar) funds were adopted in September, 1989, when the Governmental Accounting Standards Board (GASB) issued Statement No. 9. Reporting Cash Flows of Proprietary and Nonexpendable Trust Funds and Governmental Entities the Use Proprietary and Nonexpendable Accounting. Consistent with what transpired in the private sector, a statement of cash flows replaced the statement of changes in financial position for fiscal years beginning after Dec. 15, 1989. The GASB statement is not a carbon copy of the cash flow statement being required in the private sector. Selected modifications have been effected to enhance the information being provided to statement users. These variations may also be useful if the cash flow reporting requirements are subsequently extended to all types of government funds. This article briefly describes the new statement of cash flows for proprietary funds. Emphasis is placed on the similarities and differences with the private sector reporting rules. Presentation suggestions and observations on the differences between GASB and FASB approaches to cash flow presentation are provided.(1) Finally, the results of a limited scope study designed to elicit information about whether one of the two acceptable cash flow formats for proprietary funds is more readable than the other are presented. WHAT IS THE PURPOSE OF THE STATEMENT OF CASH FLOWS? The statement of cash flows should be particularly beneficial for financial analysis and planning. The expectation is that the statement will be helpful to readers who are attempting to assess: * the entity's ability to generate positive future net cash flows; * the entity's ability to meet obligations and generate needed financing when necessary; * the reasons why cash receipts and disbursements are different from reported operating income; and * the effects of recent cash transactions of a financing, investing, and capital nature on the entity's current financial position. Users are interested in a statement that is consistent in classification, comparable across government entities, and understandable. Where appropriate. GASB chose to make use of the basic reporting rules adopted by FASB for statements of cash flows in the private sector. This approach is expected to improve both comparability and understandability, particularly when the activities of the proprietary fund are similar to those of private sector organizations. Changes, particularly in classification, that GASB believes will make the cash flow details provided to readers more informative were made. Illustrative statements of cash flows, abstracted from GASB No. 9, are presented to help the reader focus on selected presentation issues. Exhibit 1 portrays the cash inflows and outflows of the University City Water and Sewer Fund using the direct method format.(Exhibit 1 omitted) This is the format recommended by the standard. Another acceptable format (the indirect format) is illustrated in Exhibit 2.(Exhibit 2 omitted) A brief examination of these exhibits by readers who have become familiar with the statements of cash flows being issued in the private sector will reveal that four, rather than three classifications are being used. Most other aspects of the statement will seem familiar. Exhibits 3 and 4 provide the reader with more explicit listings of the similarities and differences in the public and private sector reporting rules. EXHIBIT 3 CONSISTENT REPORTING RULES The standard is generally consistent with the following reporting rules for business entity statements of cash flows. * Statements of cash flows are required for all periods in which results of operations are reported. * The cash and cash equivalent definition of funds is used. A change in definition is accounted for through restatement. * The statement reconciles beginning and ending cash and cash equivalents. …

An Application of Financial Analysis of the Business Firm in a Simulated Competitive Environment

Abstract: "A procedure is described whereby the Business Management Laboratory business game was modified to produce financial data records that were then imported into the fisCAL financial analysis software package. The record schema contained 101 data fields in an ASCII format with delimiters. Data fields included income statement and balance sheet items as well as such items as the capitalization rate, discount rate, various valuation factors, etc. Students in a graduate strategic management course were required to subject the imported financial data to the structured financial analysis of fisCAL. Industry comparisons on a normalized basis were made using both percent and dollar variance measures. Such comparisons were made for income statement and balance sheet items, breakeven analysis, operating capital requirements, financial ratios, and cash market value. Based upon multiple previous periods, trends and proforma projections are made for the income statement, balance sheet, financial ratios, and cash flow management. "

Analyzing an agribusiness statement of cash flows

Abstract: Recently, the Farm Financial Standards Task Force (FFSTF) released its recommendations regarding preferable external financial reporting practices for agricultural entities. The FFSTF recommended that farm financial statements should basically follow the format of financial statements prepared in accordance with generally accepted accounting principles. Specifically, with respect to the preparation of a statement of cash flows, the FFSTF recommended that the framework established by Statement of Financial Accounting Standard (SFAS) NO. 95 should be adhered to by agricultural entities. This article explains and discusses the requirements of SFAS No. 95 as it pertains to agricultural entities and provides a framework for analyzing a typical agribusiness SCF.