Statement of Cash Flows Theory
The Federal Accounting Standards Board (FASB) creates generally accepted accounting principles (GAAP) within the United States. The FASB is a non-governmental, not-for-profit organization created to establish financial accounting and reporting standards, for the private-sector. Although the Securities and Exchange Commission (SEC) legally controls this function for public companies, as part of its mandate to administer and uphold federal securities laws provisions, it has relied on the FASB since 1973 to fulfill this role (Walker, 2004). Of the 159 pronouncements made by the FASB, Statement 95 was issued in November 1987 and focuses on Statement of Cash Flows. The term 'cash flow', in general, refers to the movement of money in and out of a business, with cash inflow typically being correlated to sales and other receipts and outflow attributed to cash payments to others such as suppliers or workers, or more simply - the receipts and payments that are made by an organization (cited in Alver, 2005). In general, an organization's cash flow statement gives record to incoming and outgoing moneys, during a specific period of time. SFAS 95 establishes the standards for the reporting of cash flows, and sets the requirement
These operating activities and the inflow and outflow of cash determine net profit or net operating profit. With the indirect method, "the reconciliation of net profit with cash flows from operating activities is somewhat misleading because the operating activities (and therefore the content of operating sections) on two financial statements are treated differently (and therefore, content of operating sections on the income statement and CFS is different" (Alver, 2005). With the indirect or reconciliation method (also known as: indirect approach, reconciliation method, net method, reconciliation approach, or net income approach), organizations are instructed to show to report the amount of net cash flow from operating activities, equal to the amount of operating cash receipts and payments, by adjusting net income as a means of reconciling it to net cash flow from operating activities. In addition to operating activities, investing activities and financing activities are the remaining classifications for cash receipts and payments. Foreign currency is a special concern. "The conversion process classifies the income statement's operating section into its major components and determines cash collections or payments for each of them. Statement 95 requires that a statement of cash flows report the reporting currency equivalent of foreign currency, utilizing the current exchange rate at the time of the cash flows. FASB has taken the position that activities that are not investing or financing are classified as operating. Net cash flow has very little information alone. This contrary treatment for dividends paid refers to the fact that dividends paid do not appear in the accrual income statement, as opposed to dividends and interest received and interest paid do appear in the accrual income statement. When using the direct method, a reconciliation of net income and net cash flow from operating activities is provided in a separate schedule ("Summary of statement", 1987). For this reason, net operating cash flow should detail the differences between operating profit and net cash flow from operating activities, or the differences between net profit and net cash flow from operating activities. It clearly appears from the direct method of preparing CFS (cash flows statement)" (Alver, 2005).
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