Introducing Students to the Direct Method Statement of Cash Flows

• In Event: Teaching and Learning Cases

Abstract

FAS 95, the Statement of Cash Flows, was issued in 1987. A major compromise was made in that statement by not requiring the direct method. A few companies tried the direct method, but now the direct method reporting is almost extinct in the U.S. The method overwhelmingly used in the U.S, the indirect method, does not fulfill the primary objective of the standard. Australia's experience with the direct method of reporting has provided a successful pilot test for the world. The direct method is easier for operating managers to understand and provides more useful information to analysts projecting future company cash flow and income. U.S. accounting texts primarily use an indirect approach to prepare the direct method statement of cash flows which makes the method appear overly complicated giving students a negative impression of the method and creating another barrier for widespread U.S. adoption. This paper presents an alternative way to introduce the direct method which highlights its advantages.

Author

• Robert Kevin Trout, Coe College