Wiley GAAP 2008

Perspective and Issues

FAS 95, as amended, establishes standards for cash flow reporting. A statement of cash flows is a required part of a complete set of financial statements for business enterprises and not‐for‐profit organizations. Only defined benefit plans, certain other employee benefit plans, and highly liquid investment companies that meet specified conditions are not required to present the statement.

The primary purpose of the statement of cash flows is to provide information about cash receipts and cash payments of an entity during a period. A secondary purpose is to provide information about the entity's investing and financing activities during the period.

Specifically, the statement of cash flows helps investors and creditors assess

1. Ability to generate future positive cash flows

2. Ability to meet obligations and pay dividends

3. Reasons for differences between net income and net cash receipts and payments

4. The cash and noncash aspects of investing and financing transactions on an entity's financial position

CON 1 states that “financial reporting should provide information that is useful to present and potential investors, creditors, and other users for making rational investment and credit decisions.” Since the ultimate objective of investment and credit decisions is the maximization of net cash inflows, information for assessing the amounts, timing, and uncertainty of prospective cash flows is needed. CON 5 concludes that financial statements must show cash flows during ...