Research Assignment
ACCT 311
The Cash Flow Statement:
Problems with the Current Rules
This article is about the cash flow statement and its problems with the current rules. It was written by Neil S. Weiss and James G.S. Yang. The cash flow statement has been used to give information about a company’s performance, as well as well as its major activities during the year. However, some of the rules for preparation make the cash flow statement less useful than it should be.
Based on the article, the authors listed weaknesses of the statement of cash flow which are divided in five sections. 1) differences between commercial and industrial companies versus financial institutions; 2) problems with operating activities; 3) problems with investing activities; 4) problems with financing activities; and 5) the role of free cash flow. Due to these weaknesses, the authors offer potential solutions to these problems that could improve the cash flow statement.
Regarding the case of financial institutions, the identification of the core operating activities is important, because they differ markedly from nonfinancial companies in this respect. Considering commercial banking institutions, where the core operations can be divided between on–balance sheet activities and off–balance sheet activities. The off–balance sheet activities consist primarily of fee-based activities for services rendered that do not create an asset or a liability. These create no problem for the cash flow presentation because they appear on the income statement and flow directly through the operating section of the cash flow statement.
The major problems are created by activities that have significant impact on the balance sheet. They are: 1) managing the accounts of depositors, which appears on the balance sheet as liabilities; 2) lending money to customers, which appears on the balance sheet as