Abstract
Since 1971, a United States enterprise that provides an audited balance sheet and income statement to its investors must also include a statement that details the cash consequences of the enterprise's operating, investing, and financing decisions. The addition of this statement, now known as the Statement of Cash Flows (SCF) responded both to a perceived investor need for cash flow information and to dissatisfaction with the laissez-faire efforts by industry and financial analysts to satisfy these needs. Accountants expected to enhance the usefulness of cash-flow information by mandating uniform reporting requirements. A study examines how well SCF information satisfies the information needs of investors and analysts by investigating the following questions. Can SCF measures be incorporated directly into commonly used economic decision models? They cannot be directly incorporated because most models require information about the future and the SCF focuses on the past. Have financial ratios based upon SCF measures been proposed and used to assess an enterprise's liquidity, solvency, and earnings quality? Many have been proposed, but only cash-flow per share is widely used. Can investors and analysts use SCF measures to sharpen their understanding of an enterprise's decisions and prospects? They probably can, at least by comparison with other accounting information that is provided.