Why Companies Are Using the Indirect Method to Report Operating Cash Flows
In 1988, the American Institute of Certified Public Accountants (AICPA) issued SFAS 95 concerning the statement of cash flows. The AICPA Board strongly recommended the use of the direct method to disclose the operating section of the statement. As a result of comments to the Exposure Draft, the indirect method was also permitted. At that time, three percent of companies surveyed by the AICPA indicated that they use the direct method. Since then, the use of the direct method has slightly decreased. This paper discusses the reasons why companies have chosen the indirect method instead of the direct method for reporting operating cash flow. A survey of chief financial officers of corporations was performed to understand the reasons why companies are choosing the indirect method. The survey found two significant reasons. First, respondents perceived that the costs of switching to the direct method outweigh the benefits. And secondly, respondents indicated that the accounting information system in place does not adequately provide the information needed to prepare the direct method.
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