The use of the statement of cash flows in governmental reporting



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Texas Tech University


Statement No. 9 of the Governmental Accounting Standards Board (GASB) requires state and local governments to prepare a Statement of Cash Flows for their proprietary funds. The accounting standard was written by the GASB in 1989 and required since 1991. The objective of this study was to determine if users of governmental financial reports perceived the statement of cash flows to be useful in the analysis of proprietary fund operations.

In a nationwide survey of 1,500 participants from citizen action groups, finance directors, city council members, county commissioners, credit rating agency personnel, and independent auditors, the answers to three research questions were sought: (1) Do users (primarily the citizenry, legislative and oversight bodies, and creditors) perceive the statement of cash flows (SCF) to provide useful information beyond what is available in the other financial statements (the balance sheet and the operating statement)? (2) Do users and preparers recognize and understand the differences between the Financial Accounting Standards Board Statement No. 95 and GASB Statement No. 9 SCF models and are these differences significant? (3) Does the use of the direct method or indirect method for the preparation of the Operating Activities section of the SCF influence users' perceptions of the usefulness of the SCF?

The results of the survey indicate that users do perceive the SCF to provide information beyond what is available in the other financial statements. Also, the users were able to correctly apply the balance sheet, operating statement, and SCF in assessing specific financial analysis issues. This result indicates that users are able to adapt to changes in financial reporting and are not fixated on the use of one financial statement in assessing the operations of a proprietary fund.

The survey results also indicate that users and preparers recognize the differences in the FASB and GASB models for preparing the SCF. Most respondents believe that the GASB model is superior to the FASB model for six reporting issues and for reporting cash flows by proprietary funds.

Finally, the responses to the survey indicate that users are influenced by the method used to prepare the SCF. Most respondents believe that the direct method is superior to the indirect method for five SCF reporting objectives. Additionally, most respondents indicate that the direct method with a reconciliation of operating income to cash flows from operations should be required for all cities preparing the statement of cash flows. This recommendation is contrary to the method currently used by most cities in reporting cash flows.

The results of this study have important ramifications for the GASB as the Board considers the possible implementation of a new financial reporting model. This new model could include a statement of cash flows prepared for the entire government. This study may serve as a foundation for the design and testing of a new SCF model.