International Research Journal of Applied and Basic Sciences
© 2014 Available online at www.irjabs.com
ISSN 2251-838X / Vol, 8 (2): 246-252
Science Explorer Publications
The Preferable Presentation Method of Models of the
Cash Flow Statement
Yadollah Tariverdi (PH.D)1, Maryam Rostami2
Corresponding Author email: tariverdi2012ir@yahoo.com
ABSTRACT: In most countries, the statement of cash flows contains three sections; though, it has five
sections in Iran. Also, for the first time, we have presented four-way classification of the cash flow
statement along with the respective reasoning. This article presents a cross-sectional pattern, viewpoints
of different groups about the presentation methods of the cash flow statement have been considered. The
result of the cross-sectional pattern shows that five-way classification of the cash flow statement is better
than two models of three and four-way as well as four-way classification is better than three-way model.
Keywords: Cash flow statement; Five-way classification model; Four-way classification model; Threeway classification model.
INTRODUCTION
With due attention to the aim of financial reporting, that is presentation of useful information to facilitate
economic judgments and decisions of the users of financial statements or that the needs of these users could be
standard quality of financial statements, this research tries to have a comparative study of different models of the
cash flows statement. Financial Accounting Standards Board (FASB) believes that decisions of investors and
creditors and their use of information are wider than the decision of other users of financial statements and so their
decisions have significant impact on the allocation of economic resources of every country.
In the USA, under FASB statement No. 95 (SFAS-95 1987) and at global level (international accounting
standards board) based on accounting standard No. 7 of International Accounting Standards Committee
Foundation (IASCF 2004) and following to the most countries in the world, the statement of cash flows consists of
three sections of operating, investing and financing activities. In Iran, from 1996 to the end of 1998, this financial
statement was presented in accordance with the above. A question arises here is that why in Iran, after the abovementioned period, the statement of cash flows changed from three-way classification to five-way classification
(Iranian Accounting Standard, No.2 2002).
Also, we propound a new model of the statement of the cash flows for the first time in this research so that
beside the recommended model for Iran and the existing model of the most countries in the world, it can be known
in a cross-sectional pattern, which of them possess the superiority?
Since the statement of cash flows arises out of the decisions of working capital (operating and financial),
investment, financing and servicing of finance of a corporation, so each of the above decisions are assessed to be
presented in a better way along with the other financial statements. Also, it must be searched out that the
statement of cash flows plainly present all the information needed for the investors.
Five, four and three-way classification models of the cash flow statement have arisen from different
conceptual frameworks and thus they are studied according to the different hypotheses in the present research.
The three-way classification model has been recommended for the Anglo-Saxon countries including America,
Australia, Canada, New Zealand and Ireland except England, international standards board and most of the third
world countries such as Egypt, Jamaica and South Africa.
The aim of the current study is to show whether or not there is difference among presentation methods of
the cash flow statement from the viewpoints of different groups (including university professors, accounting PH.D
students, certified public accountants and professional investors) and if it is so, which of them is preferable.
The result of this research will define that which method of presenting the cash flow statement is preferable
and this result can contribute to better reporting of cash flows that is one of the main factors in decision-making of
users.
Intl. Res. J. Appl. Basic. Sci. Vol., 8 (2), 246-252, 2014
Research Background
The topic of the research is new and the research has not been conducted by anyone and also carried out
researches are mainly about the benefits of the statement of cash flows. At global level, principally, theoretical
researches have been conducted such as Nurnberg (1993), Nurnberg and Largay (1996) have critically highlighted
the presentation method of the statement of cash flows. Under SFAS-95, Munter (1990) has also described the
presentation method of the cash flow statement that damages the comparability.
Three-way classification model of the cash flow statement
Nurnberg (1993, p.60) has presented the inconsistencies especially in describing SFAS-95 with the aim of
foregrounding; 'since amounts reported as cash flows from operating, investing and financing activities do not
reflect all of the cash consequences of these activities and accordingly, they should not be used in decision models
without adjustment.' Also, Nurnberg (1993, p.62) has emphasized: 'The three-way model of the statement of cash
flows is unable to present suitable definitions for each of the sections.' In SFAS-95 has been defined: 'operating
activities as a residual category to include all transactions and event other than investing and financing activities
(para.21).'
In SFAS-95 has been declared: 'Classification in financial statements facilitates analysis through classifying
inherently (from the viewpoint of nature) Similar items and separating inherently different items (para.20).' In spite
of this, Nurnberg (1993, p.61) declares in his article; 'Three-way classification of SFAS-95 results in reporting
similar cash flows differently and different cash flows similarly, just the opposite of the desired characteristic of
financial reporting to report similar items similarly and different items differently.'
Under SFAS-95, other reason is positive answer of respondents to the draft of three-way classification, so
that nearly all the respondents to the draft were in agreement with three-way classification (para.84). but the main
question is that whether other models had been given to the respondents?
In the follow-up of the recognition of the method presenting three-way classification of the cash flow
statement, the existing inconsistencies in each kind of activities of the cash flow statements are dealt with.
Interest and Dividends
According to SFAS-95, Interest and dividends received as well as interest paid are presented in operating
activities section (para.88). While these items are parts of financial activities of an entity and reporting them under
the classification of operating activities is an evident inconsistency. FASB (para.88) in explanation of this
presentation resorts to inclusion concept and states: 'Cash flows from operating activities must include items that
facilitates understanding of the reasons for differences between net income and net cash flows from operating
activities as far as possible.' 'But FASB still does not totally adhere to this and contrary to 'inclusion concept' has
removed gain or loss from disposal of fixed assets from operating activities (Nurnberg 1993, p.65).'
Income Tax
Presenting income tax paid in operating activities such as interest and dividends received as well as
interest paid causes incompatibility between classification of income statement and cash flow statement. In this
regard, Nurnberg states: 'Presenting income tax paid in operating activities contaminates reported operating cash
flows with the tax effects of gain or loss related to investing and financing activities (1993, p.61).'
'But FASB in order to explain the presentation of income tax paid in operating activities resorts to 'inclusion
concept'. Furthermore, FASB reasons that allocation of income tax paid to different sections is optional (para.92).'
Five-way classification model of the cash flow statement
Moradzadeh (2002) has critically argued about adding two sections to the statement of cash flows. He
describes: 'Segregation of these two sections cannot be suitable.' Bozorg Asl (2002) rejects his criticisms and
discusses about the segregation of the returns on investments and servicing of finance. 'In his opinion, firstly, there
is absence of unanimity about the presentation of items in this section, and secondly, in the International
Accounting Standard No. 7 (IASCF, 2004), various methods are proposed that damage the comparison. So, the
attempt was made that the two cases of coordination between financial statements and comparison between
corporations could be possible.' There are no debate about comparability, but the ambiguity that exists particularly
explaining the actual basis is that whether this conformity is vital to the extent that it accords with our presented
methods and it is not vital in the cases that it does not correspond to them? Either the reasoning of conformity
between financial statements should be accepted in principal and welcomed both desired and undesired aspects or
it should not be resorted to in principal.
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Now that this reasoning is relied on, is presenting gain or loss (such as gain or loss from the disposal of noncurrent assets) in investing activities of the cash flow statement- While disclosed in the income statement- not an
evident inconsistency?
The answer is affirmative, that is, the appropriate place for investing activities is in balance sheet, while the
appropriate place for gain or loss is in income statement. Thus, it is logical to state that 'operating activities' and
'returns on investments and servicing of finance' categories should mainly conform to income statement. While
both 'investing activities' and 'financing activities' categories should conform to balance sheet. Thus, it is a clear
inaccuracy to transfer gain or loss (resulting from disposal of non-current assets) from operating activities to
investing activities. That is, considering an expense as an asset by mistake.
The reasoning of presentation method of income tax will be presented in next section (Four-way
classification model of the cash flow statement).
The Proposed Four-way classification model of the cash flow statement
In the four-way classification model that derive from four main obligations of corporation, the section of
'financing activities' describes cash has been financed from which resources. While supplied cash has been spent
on which investing activities is noted in 'investing activities'. On the other hand, the amounts of cash which has
been produced through operation and other activities are set out in 'returns on investments' category. Finally, the
amounts of cash which paid to suppliers of capital as dividend and interest payments (including income tax) are
pointed out in 'servicing of finance' category. Briefly, legal entity finances by owners and others (such as creditors),
Then, invests by carried out financing in order to obtain returns and eventually pays dividends and interest for
financing through received returns.
In other words, the activities of an entity and the consequences of them are as follows:
1) Financing activities 2) Investing activities 3) Consequences of investing activities
4) Consequences of financing activities.
In defense of the presentation method of returns on investments section
In this category, not only the cash from operating activities is reflected, but also interest and dividends
received from financial activities are presented. Two kinds of investments are presented in investment activities;
one of them is capital expenditures, such as investing in property, plant and equipment and intangible assets and
the other one is financial investments, such as investing in debt or equity securities of individuals and other entities.
By this way, returns on investments must also include returns on operating investments (non-financial) like
investment in properties, plant and equipment, as well as returns on financial investments like investing in debt or
equity security. Each of these two kinds of investments and their structure are the outcome of the direct decisions
and performance of management of corporation.
In defense of the presentation method of Servicing of Finance
Not only dividends paid but also income tax paid is presented in this section. Apart from this, the cash
payments for the interest are presented in this category. According to one of the statements of American
Accounting Association; 'interest expense, income tax paid and dividend distribution are not considered as a part of
determinants of the entity income. In other words, above-mentioned items rather than being considered in
determining net income, they are regarded as a kind of dividend distribution.' Thus, it can be concluded that
stockholders, long-term creditors and government benefit from the entity income. The advantage of this concept of
net income is that it separates operating and financing aspects of a business enterprise from each other. That is,
net income of the business enterprise is merely operating concept of net income. While interest gained by creditors
and dividends acquired by stockholders have financial nature. 'Income tax lacks financial nature and is devoid of
absolute operating nature, too (Shabahang 2002, p.201).' The analysis provided by America Accounting
Association reveals that this reasoning more or less conforms to the reasoning which presents a distinct category
under the title of 'servicing of finance' and verifies this category of four-way classification model of the cash flow
statement.
In defense of the presentation method of investing and financing activities
Presentation method of investing and financing activities of the four-way classification model except three
basic items of gain or loss from disposal of non-current assets, depreciation of non-current assets and employees'
termination benefits are similar to the three and five-way classification models. Each of the above items will be
explained separately in the following sub-sections.
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Gain or loss from disposal of non-current assets
In the three and five-way classification model of the cash flow statement, gain or loss from disposal of noncurrent assets has been classified against the inclusion concept. If the reasoning of inclusion concept is accepted,
all its desired and undesired aspects should be welcomed. That is, when it is stated under inclusion concept, gain
or loss from disposal of non-current assets should be presented in operating activities under this concept. Also, if
the reasoning of conformity among financial statements is relied on, gain or loss from disposal of non-current
assets should be presented in operating activities according to this reasoning. Since this gain or loss generally is
related to the income statement but they are presented in the investing activities section. When elements of
financial statements are defined under the conceptual framework of financial reporting, they must be applied to
similar way in all the financial statements. Gain or loss from disposal of non-current assets is not considered as
returns of non-current assets that are presented in the section of investing activities; rather, this is related to the
operating activities section in the framework of financial statements.
Depreciation of non-current assets
One of the methods that introduced in epistemology to recognize a scientific topic is necessary to go
beyond its framework and avoid any bias. Presenting depreciation in operating activities may be either under
inclusion concept or may follow this reasoning that the depreciation expense has not been prerequisite for
spending cash. This kind of presentation is correct when cash outflow (cash outflow from acquisition of non-current
assets) is also presented in the operating activities section. However, in the existing models, this does not observe.
So, presentation of acquisition of these assets in the investing activities and presentation of depreciation in
operating activities have logical contradictions. Depreciation presentation in the income statement is considered as
returns of investments but its presentation in the operating activities is counted as cash returns on investments. If
the presentation of depreciation here means the calculation of net income in cash basis, this argument is illogical
since acquisition of non-current assets is presented in the investing activities section. So, by this kind of
presentation, appraising the potential creating cash of the entity is damaged by the investors and the other users of
the financial statements.
One of the basic thoughts of accounting is primacy of substance over form concept. Based on this concept,
financial statements must be presented faithfully. In other words, financial reporting must be based on primary of
substance over form. It is correct that depreciation is a non-current expense but theoretically, depreciation process
is believed to be a process of returns of investment. So, as acquisition of non-current asset is presented in the
investing activity section, therefore, returns of investments must be presented in the same section.
Employees' termination benefits
Employees' termination benefits and depreciation have the same reasoning. Presentation method in both
three and five-way models is correct when no cash as employees' termination benefits is paid.
Presenting employees' termination benefits in operating activities either may be within the framework of allinclusion concept or may follow this reasoning that this expense has not been prerequisite for spending cash. Thus,
it is added to net income (or operating income), so that net cash flows from operating activities are obtained. This
method of presenting is only correct when cash flows are never paid to employees for employees' termination
benefits. But should not long-term outstanding of employees be settled one day? The answer is definitely negative.
That is, this claim should be settled one day. The users of the financial statement have a clear understanding of
cash returns and long-term debt to employees. They clearly accept that employees' termination benefits are
considered as the debts of the entity. Presenting employees' termination benefits in operating activities is reported
as the returns on investments. So it damages the process of appraising the potential creating cash of the entity. As
the purpose is that by presenting operating activities, net income is calculated based on cash basis, this reasoning
is defective, since if any reasoning is accepted, all desired and undesired aspects should be welcomed. If an item
is defined as a financing activity for financial statements, it cannot be classified in financing activity in balance
sheet, while it is not classified in financing activity in the cash flow statement. This is considered an evident
inconsistency.
As the primacy of substance over form has been explained for the depreciation, this also applies to
employees' termination benefits. It is correct that employees' termination benefits amount is non-cash expense and
is not effective in the cash flows and must not reflect in the financing activities, but, essentially increase of reserve
of this expense has been shown in the balance sheet.
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Research Hypotheses
H1. From the viewpoints of different groups, five-way classification model of the cash flow statement is
better than three-way model of the cash flow statement.
H2. From the viewpoints of different groups, four-way model of the cash flow statement is better than threeway model of the cash flow statement.
H3. From the viewpoints of different groups, five-way model of the cash flow statement is better than fourway model of the cash flow statement.
METHODOLOGY
Data Collection
With due attention to the aim of the research, the questionnaire containing 18 questions that was prepared
fundamentally utilized the accounting literature on the theme of the cash flow statement, defined in SFAS-95 and
Accounting Standard No.2 of Iran.
For validity of the questionnaire, the viewpoints of accounting professors have been used and revised
accordingly. Also, to check the reliability of the questionnaire, Alpha Cronbach coefficient was calculated 90% by
using SPSS software that showed the high reliability of the questionnaire. Finally, it is worth mentioning that
questionnaire accompanied by complementary information on three, four and five-way classification of the cash
flow statement was presented to respondents.
Statistical society to distribute the questionnaires of research consist of three actual groups: first group
comprised of university professors and PH.D students of accounting from the Iranian universities, second group
comprised of managers and experts from investment companies and agencies of stock in Tehran and third group
comprised of the certified public accountants of Iran. With due attention to the statistical society of 1800 people, 91
samples were computed.
RESULT OF THE RESEARCH HYPOTHESES TESTS
The collected data based on questionnaires pave the way to test the research hypotheses. To test the
research hypotheses, Wilcoxon test has been used and the results are given in Table 1.
Table 1. Wilcoxon test results of each two groups of total groups
Null hypothesis
H1
H2
H3
Subjects
3,5
-way
classification
3,
4
-way
classification
4,5
way
classification
Z
Sig.
Error level
Result of null hypothesis
-7.182
0.000
5 percent
Rejected
-2.841
0.004
5 percent
Rejected
-5.018
0.000
5 percent
Rejected
With the study of Table 1, it is found that with due attention to the fact that significance level of z in each of
the hypotheses is less than 0.05, so the alternative hypothesis is accepted. It can be stated with 95% assurance
that from the view of different groups, five-way classification model is better than four and three-way classification
model as well as four-way classification model is better than three-way classification model.
Table 2. Friedman test results of total groups
Groups
University professors, PH.D students of accounting
Professional investors
Certified public accountants
Total groups
K- square
5.797
21.038
43.75
64.799
Sig.
0.055
0.000
0.000
0.000
Also, the results of testing the preference model of the cash flow statement among the received responses
from total groups of university professors, PH.D students of accounting, professional investors, certified public
accountants through Friedman test show that there are significant differences among models.
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Intl. Res. J. Appl. Basic. Sci. Vol., 8 (2), 246-252, 2014
Table 3. Mann-Whitney U test results of each two groups of total groups
Groups
University professors,
PH.D students of
accounting
Professional investors
certified public
accountants
Five-way classification
Z
SIG
Four-way classification
Z
SIG
Three-way classification
Z
SIG
-0.211
0.833
-1.06
0.289
-0.434
0.664
-1.022
-0.683
0.307
0.495
-0.484
-0.856
0.628
0.392
-1.402
-0.536
0.161
0.592
To test the monotony of the received responses from each of the three groups compared with another
group has been used Mann-Whitney U Test. The result of test shows that there are no significant differences
between each of two groups.
Table 4. Kruskal-Wallis test results of total groups
Model of cash flow statement
Five- way classification
Four - way classification
Three - way classification
K square
2.061
2.807
3.084
Sig.
0.56
0.422
0.379
Also, on the basis of Kruskal-Wallis test, no specific differences were observed among the responses from
total groups of university professors, PH.D students of accounting, professional investors, certified public
accountants.
CONCLUSIONS & SUGGUSTIONS
The aim of the research was to study the preferable method of presenting the cash flow statement from the
viewpoints of university professors, PH.D students of accounting, professional investors, and certified public
accountants. The research indicates important preference of five-way model of the cash flow statement compared
to four and three-way models, and also important preference of four-way model over three-way model. One of the
reasons of tendency of different groups of present research is the increase in the number of sections of four and
five-way models in comparison to three-way model.
Segregation of interest and dividends is one of the issues that all groups have emphasized. It can be
described that one of the basic reasons of first place being assigned to the five-way model and second place to
four-way model is the segregation of these items and income tax paid from the operating activities section.
Further, it is suggested that this research will be assessed and compared with market researches. In other
words, market reactions to the cash flow information should be considered.
Further, it is also suggested that with regard to the executed and identified patterns of this research and by
use of other groups like creditors, financial managers and managers of the corporation, a research can be
conducted and its findings will be compared to this result.
In the scope of academic education, it is suggested that with due attention to the identified four-way model
of the present research and with respect to its importance among two other models, it can be explained and
analyzed for the students and people along with the two other models.
In the scope of standard setting, it is necessary to be mentioned that a model of the cash flow statement
has been suggested for the first time with the help of the authors. Results of this model according to the present
research have been similar to the results of the recommended model for Iran. Thus, it is suggested that this model
also should be considered as standard making in the work statute to pave the ground for the presentation method
of the statement of cash flows.
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Financial Accounting Standards Board (FASB). 1987. Statement of Financial Accounting Standards No. 95: Statement of Cash Flows,
Stamford.
International Accounting Standards Committee Foundation (IASCF). 2004. International Accounting Standard No.7: Cash Flow Statement.
Moradzadeh fard M. 2002. Cash Flow Statement, Iranian Standard Versus International Standard. Hesabdar Monthly,147.
Munter P. 1990. Form over Substance, Another Look at: The Statement of Cash Flows. CPA Journal, September, 54-56.
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