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Accounting

ACC 557 Week 9 DQ 1 Cash Flow Reporting

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Cash Flow Reporting
Given the complexities related to preparing and interpreting the statement of cash flow, evaluate
the current requirement under GAAP and IFRS, indicating improvements that you would make
to each method's requirement to better serve the users of the information. Provide a rationale
for your changes.
analyze the impact of erroneous classifications in the Operating Activities section of the
statement of cash flows, detailing how the distortion can impact the decisions made by financial
statement users. Suggest how these errors may be minimized.

Meaningful interpretation of the cash flow statement can be done by reviewing the
quality of income ratio, cash acquisitions ratio and free cash flow ratios. Quality of income
states how much cash does net income finally result in. The ratio is calculated as Cash flow
from operating activities/Net Income. Cash acquisitions can be used to analyze how much
internally generated cash is used to fund acquisitions/capital expenditures. The ratio is
calculated as cash flow from operations/capital expenditures. Free cash flow is derived as
cash flow from operations less capital expenditure. This ratio helps is analyzing how much
the free cash the company is a left with after funding the acquisitions/capital expenditure.
To better serve the users of the information, the cash flow statement should not have
interest/dividend expense and income as part of cash flow from operating activities. Rather,
the payments towards interest and dividend should be treated as part of financing activities
and interest and dividend received should be treated as part of cash from investing
activities. This is because interest and dividend payment are towards financial liabilities
and as such not operating in nature. Moreover investments made are treated as investing

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