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EXECUTIVE SUMMARY
Which method of presentation is better for the cash flow statement: the direct method (DM) or the indirect method (IM)? The issue is still being discussed.
The Financial Accounting Standards Board (FASB) has traditionally encouraged entities to report major classes of gross cash receipts and gross cash payments and their arithmetic sum-the net cash flow from operating activities (the direct method, DM). Very few financial statement preparers, however, adhere to the guidance because the indirect method (IM) continues to be the most favored presentation method for preparers of cash flow statements (Accounting Standards Codification® 230-10-45-25).
In 1987, the FASB published Statement of Financial Accounting Standards 95 (SFAS 95), "Statement of Cash Flows," which set the stage for the statement of cash flows as we know it today. Over the Statement's 29-year history, rulemaking bodies made two noteworthy attempts to require the DM, and another attempt is probably on the horizon. The first attempt occurred when the Statement was released. The second attempt occurred in 2008 when the FASB and the International Accounting Standards Board (IASB) issued a joint discussion paper titled "Preliminary Views on Financial Statement Presentation." The discussion paper proposed, among other things, a mandate for the DM. As part of an overall tightening of the cash flow activity classification rules, attempts continued in 2014 and 2015.
In this article, we provide a history of the cash flow state- ment, followed by an analysis of the public's response to the most recent attempt to mandate the direct method. Then we describe the FASB's current ongoing efforts regarding the direct method, and we close with an analysis of which method is preferable.
HISTORY AND TIMELINE OF THE STATEMENT OF CASH FLOWS
Prior to the release of SFAS 95, Accounting Principles Board Opinion 19 (APB 19), "Reporting Changes in Financial Position," allowed the reporting of cash flows, but it was not a requirement. SFAS 95 established the current rules for the statement of cash flows- classifying cash flows into operating, investing, or financing activities.
The guidance of SFAS 95 allowed a choice of either the DM or IM of presentation for cash flows from operating activities. Although SFAS 95 did not require the DM, it encouraged the DM in lieu of the...