Cash Flow Statements Can Save Your Business

The balance sheet and income statement have been required statements for years, but the cash flow statement has been formally required in the United States only since 1988. However, cash flow statements, in some form or another, have a long history in the United States. In 1863, Northern Central Railroad issued a summary of its financial transactions that included an outline of its cash receipts and cash disbursements for the year. In 1902, United States Steel Corporation produced a report that listed the major causes of the change in “funds” during the year, with funds being defined as current assets minus accounts payable. A working capital funds statement became increasingly popular after 1920. 

 

In 1971, the APB issued Opinion No. 19 officially requiring that a funds statement be included as one of the three primary financial statements in annual reports to shareholders and that it be covered by the auditor’s report. This statement was called the statement of changes in financial position, but was largely undefined. During the 1970s, the statement of changes in financial position (or funds statement) was not given great emphasis and was usually not even discussed in introductory financial accounting courses. 

 

During the early 1980s, the Financial Executives Institute (FEI) encouraged its members to adopt a cash emphasis in their statements of changes in financial position. In 1980, only 10% of the Fortune 500 companies used a cash focus; the other 90% reported net changes in working capital. By 1985, 70% used a cash focus. During this same period, the FASB issued Statement of Financial Accounting Concepts No. 5, which suggested that, conceptually, a cash flow statement should be part of a full set of financial statements. In late 1987, the FASB issued Statement No. 95, which superseded APB Opinion No. 19. Instead of allowing various definitions of funds, such as cash or working capital, and a variety of formats, the FASB called for a statement of cash flows to replace the more general statement of changes in financial position. Because the required cash flow statement is relatively young (remember, double-entry accounting is 500 years old), it sometimes doesn’t get the emphasis it deserves as one of the three primary financial statements. Most of the age-old tools of financial statement analysis do not incorporate use of cash flow data.

 

In fact, because the traditional analysis models were developed in an age when cash flow data were not available, analysts will go to great lengths to approximate cash flow numbers, seemingly unaware that since 1988 the actual numbers have been easily available in the cash flow statement. For example, a number often used in evaluating a company’s health is earnings before interest, taxes, depreciation, and amortization (EBITDA). When pressed about the reason for using this number, an analyst will say, “EBITDA approximates operating cash flow.” Why don’t analysts use the real cash flow numbers? Because information from the cash flow statement is not yet ingrained in the analytical tradition—but it will be.

 

Acme, Inc. – Cash Flow Statement for the Year Ended Dec. 31, 2018

 

Cash Flow From Operations
 

Receipts  

Customer Invoices

 

Other

$80,500

Disbursements

$1,500

Employee Salaries

 

Suppliers

-$45,000

Other

-$25,500

Net Cash Flow From Operations

-$5,000

Cash Flow From Investments

$6,500

Equipment and Software Purchases

 

Net Cash Flow From Investments

-$5,500

Cash Flow From Financing

-$5,500

Loan Payments

-$3,300

Shareholder Dividends

-$5,000

Net Cash Flow From Financing

-$8,300

Net Change in Cash Balance

-$7,300