Simplifying a FASB 95 Procedure (1990)

SIMPLIFYING A FASB 95 PROCEDURE Many practitioners believe the direct format of the newly required statement of cash flows can better fill clients' information needs because of its breakdown of operating activities into major classes of cash inflows and outflows. Unfortunately, however, there are problems in preparing the direct format. This article describes a worksheet that helps solve some of these difficulties. IMPLEMENTATION PROBLEMS The two major disadvantages in using the direct format are lack of familiarity and the cost of preparation. CPAs often are less familiar with the process and the information necessary to prepare operating activities in the direct format. If this format is used, Financial Accounting Standards Board Statement no. 95, Statement of Cash Flows, also requires preparation and presentation of operating activities in the indirect format as a supplemental disclosure. This requirement can add to the cost of preparation. THE SIMULTANEOUS WORKSHEET A worksheet that prepares the statement in both formats simultaneously can help solve these difficulties. It uses a format and procedures familiar to practitioners. For merchandising or service-oriented clients, the information needed to prepare both methods simultaneously generally is the same as that used in the indirect format. For manufacturing clients, the simultaneous worksheet can be used if a breakdown of the costs capitalized in the work-in-progress account is available. The simultaneous worksheet also presents the income statement and the direct and indirect formats side by side. This permits straightforward comparisons, which can be quite beneficial in explaining the differences to clients, users and staff. The worksheet thus can help solve the major problems associated with the direct method. Finally, the worksheet format can be easily used in any spreadsheet program. The simultaneous worksheet for a merchandising company, shown in exhibit 1 at left, is based on the 1988 and 1987 balance sheet (exhibit 2 on page 126), the 1988 statement of income (exhibit 3 on page 127) and other information (exhibit 4 on page 127). Note that the worksheet's analysis of transactions section is identical to the top section of the worksheet used to prepare a statement of changes in financial position. The procedures used to analyze the changes between the beginning- and end-of-the-year account balances also are the same as were used for that worksheet. Two adaptations to the adjustments section of the old worksheet permit simultaneous determination of the direct and indirect formats. First, the format is changed to include two additional columns for operating activities. The accrual basis column lists line-item revenue, gain, expense and loss components of net income. The cash basis column contains estimates of major classes of cash flows from operating activities that are analogous to the line-item income components. The second adaptation is procedural. When a change in an asset or liability account's balance is used to remove the effect of an accrual, deferral or nonoperating activity from net income (the indirect format), the change must be recorded on the same line of the worksheet as the revenue, gain, expense or loss for that particular asset or liability. Thus, while net income is being reconciled with cash flows from operating activities through a vertical adjustment, the major classes of operating cash flows can be estimated simultaneously through a horizontal adjustment. As illustrated on the worksheet, customer cash receipts are estimated by adjusting net sales (sales revenue less bad debt expense) for the changes in both accounts receivable and bad debts. Cash received from interest is equal to interest revenue adjusted for the change in interest receivable. Similar adjustments are made to estimate the major classes of cash disbursements. …