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Article Review:Academic Research on the Reporting of Cash Flows from Operations by Orput and Hales

Updated on January 22, 2015

This article is focused at reviewing various academic studies in regard to the efficacy of various techniques of presenting cash flows. In this review, the authors establish that the various study findings evaluated have pointed out that the direct approach (DM) in cash flow information as being significant in cash flows. In addition, the study findings reveal that direct method information could be reflected in the stock prices, pointing out that users have a preference of employing such information when availed. However, the authors fail to relate on how and why this information penetrates through the stock prices. Finally, the authors also note that there is economic viability in use of direct information and that there are many benefits that are derived from direct method information which overrides the exceeding costs. According to the authors, this review is significant to various stakeholders including policy makers who will design strategies that incorporate direct method presentation of cash flows, and researchers who are concerned on the issue of cash flow reporting.

Purpose of the review

The aim of this article is to find out through a literature review, the benefits associated with direct cash flow reporting. The author’s interests in undertaking this research was triggered by the policy requirement of the International Accounting Board (IASB), and the Financial Accounting Standards Board (FASB), which require direct cash flows to be presented in a format, that is direct. This translates that business firms are required to report gross outflows and inflows that emanate from their major operations in a specific period.

Study Objectives

This article is aimed at addressing the following objectives

1. To establish whether DM has significant benefit in presentation of IM information

2. To find out whether users of financial statements employ DM components in the event of disclosure

3. To establish the estimation accuracy of DM components in relation to the disclosed direct method components

4. To find out whether it is easier to use DM formats than IM

5. Available evidence in regard to benefits associated with DM SCF

Findings

Findings from the reviews carried out by the authors reveal a high level of evidence suggesting that DM SCF contains many benefits when compared with IM SCF alongside other financially related statement of information. According to the authors, the findings suggest that the information could be utilized in improving predictions for operating performances in future through measurements of earnings and Cash from Operations (CFO).

Further, the study findings further suggest that DM components have the potential of improving the significance of specific information when compared to similar items. In essence, most of the studies analyzed in this article have supported the assumption that the information in DM SCF whether derived from financial estimates, or reported by entities have significant usefulness beyond those provided by IM SCF. This is despite the fact that some studies, though fewer in number which offer a contradictory opinion, that IM is more beneficial than DM.

Conclusion

The conclusion that results from the author’s analysis is that, there is clear evidence from studies that a DM SCF harbors incremental information which is crucial in prediction of future CFO and earnings. However, the authors note the limitations of these empirical findings as lacking evidence on whether users of financial statements actually utilize DM information when offered.

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