Statement of Cash Flows: Time for Change!

The statement of cash flows is one of the three basic financial statements required under generally accepted accounting principles (GAAP). Recent financial reporting scandals have shown that this basic financial statement is in need of reform. The presentation of operating cash flow using the indirect method is confusing to many readers, including financial analysts. The terminology used in the statement is unclear and unhelpful. The misclassification of specific cash flows in the operating, financing, or investing sections can result in overstatement of operating cash flow. The direct method for reporting cash flow from operations is recommended, together with an improved reconciliation of operating cash flow to net income. Moreover, companies need better guidance on classifying individual cash flows; the statement itself needs improved descriptions and straightforward terminology.