Cash flow and funds statements for investors : an evaluation

The thesis is divided into three main sections: Reporting to Investors.--The first part consists of a general apprai8al of shareholders' needs for disclosure in company published accounting statements. Some of the reasons for the popularity of the cash flow calculation and for the development of certain types of funds statement are thought to lie in the deficiencies of conventional accounting statements. The remainder of the thesis considers cash flow and funds statements as a means of fulfilling the disclosure needs of informed shareholders and of skilled financial analysts. Concepts of Cash Flow.--Cash (net profit plus depreciation) is an ambiguous term, with several different interpretations in the literature and in practice. Three different attitudes to cash flow appear to exist. Firstly, it was considered 8S measurement of performance of a business. In no sense should cash flow be interpreted as a substitute for or as an improvement on accounting net profit. If there are defects in conventional accounting statements, the logical is to overcome these defects, not to supply supplementary data. Secondly, financial aspects were considered. Superficially, the term connotes an actual flow of cash as a result of trading operations. This interpretation is incorrect and misleading. The term pseudo cash flow” or “approximate working capital provided by would give a better indication of the nature of accounting net profit plus depreciation. The most justification development of cash appears to lie in this financial field. However, the financial effect of trading operations presents only an incomplete and maybe picture of the financial transactions a business. There is a need for a complete statement of all financial transactions. Thirdly, the assertion by analysts that cash flow represents internally generated growth potential was considered. Presumably they think that increased net profit can result from reinvestment of depreciation charges. Models illustrating growth in of fixed assets and in estimated net profits, in two different types of situation were evaluated. Growth in fixed assets, and more rarely in net profit, may sometimes occur. However, there are a number of complex limiting assumptions which must be complied with in practice, before any growth may arise from this source. It is unwise to consider that cash flow has any general applicability as an indicator of possible future growth in or net profits. Statements Source and Application of Funds (Commonly called Funds Statements).--Suitability as a third major accounting statement revealing financial transactions was considered. At present, although there is a consensus of opinion that funds statements should be disclosed, the statement has not been logically and the term funds is frequently either not defined or used ambiguously. The thesis examines the most popular concepts funds, including cash, working capital, and others. Statements of this type show flows into and out a specific pool funds. Strictly speaking they are limited to transactions which produce changes in the specific pool during the year. These pool concepts are not relevant for a intended to reveal all financial transactions of a period.Mason’s recommended statement of changes in total resource was considered, with particular attention to its accompanying restrictions on a literal total assets concept of funds. As these limitations result in the denial of many important accrual accounting entries, this concept is not theoretically justifiable for a third major accounting statement, of complementary status to the two more traditional accounting statements. Finally, a form of third accounting statement revealing all financial transactions is proposed. The ambiguous term “funds” and the notion of fund “flows” is abandoned. Instead the new statement is a statement of change in assets and changes in financing of assets. It is prepared from the same basis of accrual accounting as the other two accounting statements. If prepared in comparative form for a number of years, trends in financial policy can be readily assessed. Appendixes include a survey of Australian analysts' attitudes to cash flow and funds statements, as background to the study.