Let us start by saying that very often it is very difficult to control the flow of money even in our everyday life. Sometimes we are very surprised by the changes of our budget that happen to be absolutely uncontrolled though we always try not to neglect it. So, what can we say about the way large companies and firms control their cash flows? We are sure that it is a far more complicated process than control of our cash flow. And it is sure to be absolutely impossible without statements of cash flows.
Now we are to disclose the notion of the statement of cash flows. Our understanding of this term is the following: a cash flow statement is a financial document, a report that displays the outflow and inflow of cash during a certain period of time. It is necessary to analyze and study the cash flow statement, because it helps to assess the capability of the company very fast and the results obtained will be evident, correct and trustful. However, in case when the statement of cash flow is neglected, cash flow disclosure may be needed.
In our essay we would like to present the summary of the article by Peter Reilly who is an analyst at Deutsche Bank. His article “End exploitation and act on cash flow disclosure” has captured our attention and we have found it very informative and useful.
Reilly makes the reader interested at once, saying that he sometimes wonders “whether the highly intelligent people who set accounting standards live on the same planet …” (Reilly par. 1). That is so, because his goal as an analyst is to study the documents and reports of the companies for him to understand the real state of things there. He says: “Balance sheets are important, but tell you nothing about flows” (Reilly par. 2). Still, you have to find your way, because if you do not understand the cash flows, it means that you are absolutely ignorant of the company itself. And what is more, the worst consequence connected with poor cash flow disclosure is not inefficient capital market; it is the opportunities of the companies to present their business affairs in a very flattering light.
Reilly sets a very good example:
…under both US and international standards, companies are not required to disclose the debt at acquired companies and yet are allowed to offset the acquired cash against the acquisition price (Reilly par. 7).
Any company wanting to understate the amounts it is spending on acquisitions simply gets the management of the target company to draw down extra debt prior to consolidation (Reilly par. 8).
This example is not pure theoretical, it has been used by real companies.
We get to know that in case with cash flows details are not the subject for analysis. To make the work productive and effective standard-setters should gather with analyst and investors and study the actual set of accounts to appreciate how unsatisfactory current cash flow disclosure is.
The final part of the article presents special interest for us, because here Peter Reilly tries to define the function of the cash flow statement. He thinks that “the statement should be the bridge between the income statement and the balance sheet” (Reilly par. 15). Its main aim is to give us the missing information and to make the state of things clear.
To conclude, we want to say that we agree with the author of the article who thinks that an overhaul of the cash flow statement would be popular and would enhance the standard-setters’ reputation (Reilly par. 17).
Works Cited
Reilly, Peter. “End exploitation and cat on cash flow disclosure”. The Financial Times.Web.