Questions On Financial Accounting Standards

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According to the Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 230 (ASC 230), cash flows are classified in the Statement of Cash Flows (SCF) as cash flows from operating, investing, and financing activities. ASC 230 replaced FASB Statement No 95 (SFAS-95). This paper will discuss certain problems in SFAS-95 that continue to exist. Certain related cash flows are classified differently because of inconsistencies and ambiguities in classification. Further, the indirect method is widely executed while the direct method discloses more cash flow information. This paper alerts users to make more informed assessments of cash flow information with regards to the subtotals from operating, investing, and financing activities. This paper also suggests the FASB require the direct method for reporting purposes to improve investors’ and creditors’ judgment accuracy. At the same time, this paper provides users ratios to assess the quality of income to make more informed decisions. ASC 230 requires that companies provide the SCF for each operational period. The SCF provides information about cash and cash equivalents, and classifies cash receipts and cash payments as resulting from operating, investing, or financing activities (Nurnberg 1993). The measurement of the SCF is considered as being more reliable and more objective than the measurement of the income statement because the latter involves more judgment about accruals, allocations, and
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