The New Demands of Cash Flow Reporting.

• Author: Malwitz, Michael

Tougher approaches by the regulatory and investment communities will require companies to improve their analysis and forecasting.

Recently, the financial and regulatory communities have shown renewed interest in flow reporting requirements. Consider the following comments and actions:

* Robert A. Howell, a visiting professor of accounting at Dartmouth College's Tuck School of Business and senior partner of The Howell Group, says, "Accounting has gotten to be such a manipulated thing. Cash is real."

* Investment banking firm Bear Stearns Cos. Inc. suggests that for the majority of industry groups, investors have already begun to assess companies on their cash earnings.

* The Financial Accounting Standards Board (FASB) recently issued Statement of Financial Accounting Concepts No. 7, Using Cash Flow Information and Present Value in Accounting Measurements, and is now publishing new standards building on these concepts at a torrid pace (for the FASB).

The key question is whether a company's financial reporting systems and staff are equipped to deal with new demands for cash flow analysis. Though it can be a simple exercise to prepare a cash flow statement for a current period, it is more difficult to accurately forecast cash flow at the level of detail now required.

Issued in 1987, FAS 95, Statement of Cash Flows, established the current standards for cash flow reporting. It superseded 1971's APB Opinion No. 19, Reporting Changes in Financial Position, and requires a statement of cash flows as part of a full set of financial statements for all business enterprises in place of the statement of changes in financial position.

FAS 95 requires that a statement of cash flows should classify cash receipts and payments according to whether they stem from operating, investing or financing activities. This statement encourages enterprises to report cash flow from operating activities directly, by showing major classes of operating cash receipts and payments (the direct method). For example:

* Net cash provided from operating activities (payments received from customers, payments made to employees, etc.)

+ Net cash used in investing activities (payments received for sale of facility, capital expenditures, etc.)

+ Net cash provided by financing activities (borrowings, stock issuance, dividends paid, etc.)

* Equals Change in Cash

These are fairly easy to construct on a backward-looking basis because all amounts are known. However, management and regulatory...