Discuss reasons why the FASB replaced the more general funds flow concept with a cash flow statement.
What will be an ideal response?
ANSWER:
Two goals of financial reporting are: (1) reporting information about the firm’s net resources and changes in those resources and (2) reporting information useful in assessing futures cash flows. These two reporting goals motivated the FASB’s adoption of a cash flow statement as an important supplement to accrual-based financial statements. During the FASB’s deliberations that led up to the cash flow statement, a consensus emerged that funds should be defined as cash rather than net working capital mainly because net working capital is a poor measure of liquidity. Three reasons for this are: (1) deferred charges and credits are included in net working capital but have no cash flow consequences; (2) conversion of current assets can take a year or longer if the firm’s operating cycle exceeds one year; and (3) items such as inventory are carried on a cost basis and thus do not explicitly reveal the cash flow potential of the inventory.
You might also like to view...
The Occupy Wall Street movement consists of activities who are protesting against social and economic inequality.
People in the movement are concerned that the current laws and financial systems disproportionately favor corporations and the rich and exclude others from sharing in the economic wealth of the nation. They fear that such inequities will eventually undermine democracy and destabilize the country. The Occupy movement is most consistent with which school of thought? Explain your answer.
The subjective nature of service quality means that ______.
a. the same service may be viewed differently by different customers b. different services are viewed in an identical fashion by different customers c. it is easier to assess service quality than product quality d. it is easier to satisfy service customers than product customers
Market anomalies are caused by
A) investors' efforts to avoid or postpone taxes. B) different levels of risk. C) statistical quirks. D) some poorly understood combination of factors.
In which of the following ways is a limited liability company like a corporation?
A) It was created and developed first in the United States. B) It can choose to be considered a partnership for tax purposes. C) Its owners' liability is restricted to their investment. D) It is directly managed by the owners.