rareanna.blogg.se

This one finding, while provocative, does not substitute for a broad-based study of a possible relation between the level of operating cash flow and future financial condition. The authors found that Grant’s operating cash flow was much more accurate and timely as an indicator of its impending bankruptcy than were traditional financial ratios or movements in Grant’s stock price. Grant that appeared in the Financial Analysts Journal. The most compelling proof of the usefulness of OCF data that we have discovered is a study of W.T. The growing legion of supporters of operating cash flow-which has great intuitive appeal-would be hard pressed to produce objective evidence of its superiority. While we applaud attempts to glean better information on corporate past and future performance, we fear that operating cash flow may come to be regarded as the barometer for gauging company performance. In explanation the FASB contended that “the greater the amount of future net cash inflows from operations, the greater the ability of the enterprise to withstand adverse changes in operating conditions.” 1įurthermore, in November 1981 and December 1983, the Financial Accounting Standards Board issued exposure drafts proposing that every corporate financial statement include information on cash flows during the particular period. Only 27 % used the cash flow basis in 1980, while 52 % used the working capital basis. Of the total, 57 % said they intend to use the cash flow basis in the statement, while 23 % plan to use the working capital basis. As of the end of 1983, more than 750 financial executives, financial analysts, individual investors, and commercial bankers had responded to the FEI study. Preliminary results of an FEI-sponsored study on the structure and use of the funds flows statement suggest a growing preference for a cash-basis definition of funds over the traditional focus on working capital. Since 1981 the Financial Executives Institute has been encouraging companies to voluntarily report cash flows in their statements of changes in financial position, that is, “funds flows” statements. Corporate executives have penetrated the veil of accounting profits, have found them sometimes misleading, and have turned to the “real thing,” cash flow data, to evaluate their company’s performance and that of competitors. Grant Company proved that traditional accrual accounting-based data had limited value in alerting investors to important changes in a company’s financial condition.Īccordingly, securities analysts have come to view cash flow information as a more accurate yardstick for gauging debt and dividend-paying ability. To many, the collapse of Penn Central and the W.T.

Accelerating the trend have been several developments-including new financial reporting rules on such issues as foreign currency translation, equity earnings, interperiod income tax allocation, and lease and interest cost capitalization-that put greater distance between a company’s net income and its cash flow the adoption of “liberal” accounting practices by some companies and record inflation levels. The trend toward wider acceptance of this yard-stick has been building since the early 1970s. According to recent surveys, corporate and government officials have accepted this view they rated cash flow data the most important piece of information contained in published financial statements. The OCF measure was less accurate a predictor of failure than a combination of six conventional accrual-based measures, including debt-to-equity and profitability ratios.Ī growing number of securities analysts, financial writers, and accounting policymakers contend that financial statements providing information of a company’s cash flows yield a better measure of operating performance than do the company’s income statement and balance sheet. They studied 290 companies, 60 of which had been declared bankrupt, and found that operating cash flow data for a five-year span could not distinguish between the healthy enterprise and the one that would fail. How good a yardstick is operating cash flow? Not very, say Messrs. Apparently speeding the trend is action by the Financial Accounting Standards Board. Moreover, financial executives of businesses increasingly prefer a cash-basis assessment of available funds over the traditional working capital status. As a guide to the health of a company, operating cash flow data have a great vogue these days among those who watch the fortunes of corporate America from the outside-especially securities analysts.