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Conflict Exists Over How to Calculate Cash Flow

Colleen Cunningham | December 22, 2009

Every year I attend Financial Executives International’s annual Current Financial Reporting conference. The 2009 conference, held in November, was its usual excellent event, addressing everything from new accounting rules for mergers to new guidance on fair value to the future of financial statement presentation.

And one specific point about the future of financial statements ended up dominating discussion: the “direct method” of compiling the cash-flow statement.

When the Financial Accounting Standards Board issued Financial Accounting Standard No. 95, Statement of Cash Flows, back in 1987, it made the decision only to encourage, not require, the direct method for reporting cash flows. In the 21 years since, however, very few companies have chosen to use the direct method. The large majority instead has used the indirect method, no matter what FASB might be encouraging.

Both methods require cash flows to be grouped into operating,...

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