In the USA, the FASB adopted the Statement of Financial Accounting Standard (SFAS) 95 in 1987 that mandated the Statement of Cash Flow as an integral part of the financial statement. The statement of cash flow was designed to bridge the information gap between traditional accrual accounting and an understanding of the cash flow activities of an entity. A gap existed because accrual accounting failed to provide relevant information to assess the amount, timing and uncertainty of future cash flows. Its predecessor, the Statement of Changes in Financial Position (SCFP), had not specified the primary categories of cash flow activity and the term cash had not been defined. With SFAS 95, the primary categories of cash flow are defined as operating, investing and financing activities. SFAS 95 also defines cash to include cash equivalents with maturities of 90 days or less, such as treasury bills, commercial paper and money market funds (Zeller & Stanko, 1994b: 55). South Africa was one of five countries, according to Wallace and Collier (1991:44), that required entities to issue a cash flow statement. Other countries that issued such standards were Canada (September, 1985), New Zealand (October, 1987), the USA (November, 1987), and the United Kingdom (UK) and Republic of Ireland (September, 1991).
AC 118 was issued in July 1988 by the SAICA. A statement of cash flow information was required to replace and improve the statement of sources and application of funds. According to Schedule 4 of the Companies Act (Act No. 61 of 1973), certain specific information was to be supplied as an addendum to the balance sheet. In this case the balance sheet, income statement and cash flow statement would supply the specific information (Cilliers, Rossouw, Mans, Grobbelaar, Van Schalkwyk, Stegmann, Wesson & Van der Merwe, 1995:480). The objectives of the statement of cash flow information was to provide users of financial statements with information concerning the source and applications of all financial resources (cash funds) during an accounting period, in particular cash generated or utilised by operations, investing activities and financing activities (Cilliers, Rossouw, Grobbelaar, Mans & Van den Berg, 1992:125-126). Cash is defined as cash on hand in the bank and cash equivalents, such as money market instruments. Investment activities are those activities relating to the acquisition and disposal of fixed assets and investments, including advances not falling within the definition of cash. Financing activities are activities resulting in changes in the size and composition of the debt and equity. Operating activities include all transactions and other events that are non-investing and non-financing activities. Cash flows from operating activities are generally the cash effects of transactions and other events that enter into the determination of income (SAIC, 1996:par .04-07).
Exposure Draft 101
In June 1995, ED 101, Cash Flow Statement was issued by the SAICA indicating that South Africa recognised the international need for a statement based on cash flows.
In a study by Mielke and Giacomino (1987:151) before IAS 7 was revised, a proposal was made to the IASC to consider drafting a new IAS that would require entities to:
• Use a cash concept of funds;
• Use cash, bank deposits, and short-term, highly liquid investments as the definition of cash;
• Disclose operating activities separately (at a minimum) and give additional consideration to separation of investing and financing activities;
• Use the indirect method of reporting cash from operations;
• Disclose all-financial-resources transactions in footnote form;
• Provide separate line-item disclosure for dividends; and
• Disclose the effect of foreign currency adjustments, interest payments, extraordinary items and taxes.
IAS 7 was revised and issued in 1992. ED 101 followed the revised international accounting standard in 1995 and ED 10 was to become the new accounting standard for cash flow statements in South Africa.
As the content of ED 101 has largely been retained in AC 118 (revised) (see 2.3.5), ED 101 was significant because it followed IAS 7 (revised) and moved away from an all-financial resources approach to a cash flow approach for cash flow statements.
When comparing AC 118 with ED 101, the shortcomings of AC 118 become more apparent. The main differences between the two standards are as follows (Cilliers et al., 1995:549-560):
• The proposed new standard supports a pure cash flow approach whereas AC 118 had an all-financial resources approach. For example, AC 118 discloses the issuing of shares to obtain an interest in another entity as a financial activity, and the acquisition of the interest in the other entity as an investment activity. In the new statement, this transaction will not be included in the cash flow statement because there is no cash flow involved. Information concerning this transaction will be disclosed elsewhere in the financial statement.
• The proposed new standard encourages the reporting of cash flows from operating activities using the direct method whereby major classes of gross cash receipts and payments are disclosed. Otherwise, the indirect method, as in AC 118, will be allowed. According to the indirect method, the net profit or loss is adjusted for the effects of transactions of a non- cash nature, any deferrals or accruals of past or future operating cash receipts or payments, and items of income or expense associated with investing or financing cash flows.
• The proposed standard allows that certain cash flows be disclosed on a net basis.
CHAPTER ONE INTRODUCTION, PURPOSE AND IMPORTANCE OF THE STUDY
1.2 STATEMENT OF THE PROBLEM
1.3 OBJECTIVES OF THE STUDY
1.4 IMPORTANCE OF THE STUDY
1.5 RESEARCH METHODOLOGY
1.6 PLAN OF THE STUDY
CHAPTER TWO THE CASH FLOW STATEMENT IN FINANCIAL REPORTING
2.2 THE DEVELOPMENT OF AN ACCOUNTING FRAMEWORK FOR FINANCIAL REPORTING
2.3 THE DEVELOPMENT OF THE CASH FLOW STATEMENT
2.4 RE 118 IN COMPARISON TO OTHER CASH FLOW STANDARDS
2.5 THE OBJECTIVES OF THE CASH FLOW STATEMENT
2.6 THE USE OF RATIOS IN ANALYZING THE CASH FLOW STATEMENT
CHAPTER THREE ANALYSING FINACIAL STATEMENTS
3.2 ANALYSING FINANCIAL STATEMENTS
3.3 ANALYSIS OF THE CASH FLOW STATEMENT
3.4 CASH FLOW RATIOS FOR FINANCIAL ANALYSIS
CHAPTER FOUR CASH FLOW RATIOS AVAILABLE FOR FINANCIAL ANALYSIS
4.2 CASH FLOW RATIOS AVAILABLE FOR EVALUATING THE CASH FLOW STATEMENT
4.3 CASH FLOW RATIOS SUGGESTED BY BEAVER (1966)
4.4 CASH FLOW RATIOS SUGGESTED BY GIACOMINO AND MIELKE (1988, 1993)
4.5 CASH FLOW RATIOS SUGGESTED BY CASRSLAW AND MILLS (1991)
4.6 CASH FLOW RATIOS SUGGESTED BY FIGLEWICZ AND ZELLER (1991)
4.7 CASH FLOW RATIOS SUGGESTED BY ZELLER AND STANKO
4.8 CASH FLOW RATIOS SUGGESTED BY RUJOUB, COOK AND HAY (1995)
4.9 CASH FLOW RATIOS SUGGESTED BY MILLS AND YAMAMURA (1998)
4.10 CASH FLOW RATIOS SUGGESTED BY OTHER RESEACHERS
CHAPTER FIVE DEVELOPING A SET OF CASH FLOW RATIO FOR FINANCIAL ANALYSIS
5.2 RATIOS FOR FINANCIAL ANALYSIS
5.3 COMPARING CASH FLOW AND TRADITIONAL RATIOS
5.4 SELECTING CASH FLOW RATIOS
5.5 THE IMPORTANCE OF CASH FLOW INFORMATION TO PREDICT FAILURE
CHAPTER SIX RESEARCH METHODOLOGY AND ANALYSIS OF RESULTS
6.2 RESEARCH METHODOLOGY
6.3 ANALYSIS OF RESULTS
CHAPTER SEVEN SUMMARY, CONCLUSIONS AND RECOMMENDATIONS