Financial Statement Analysis, 5th Edition

CHAPTER 4The Statement of Cash Flows

The present version of the financial statement that traces the flow of funds in and out of the firm, the statement of cash flows, became mandatory, under Statement of Financial Accounting Standards (SFAS) 95, for issuers with fiscal years ending after July 15, 1988. Exhibit 4.1, the 2019 cash flow statement of Motorola Solutions, illustrates the statement's division into cash flows from operating activities, investing activities, and financing activities. The predecessor of the statement of cash flows, the statement of changes in financial position, was first required under Accounting Principles Board (APB) opinion 19, in 1971.

Prior to 1971, going as far back as the introduction of double‐entry bookkeeping in Italy during the fifteenth century, financial analysts had muddled through with only the balance sheet and the income statement. Anyone with a sense of history will surely conclude that the introduction of the cash flow statement must have been premised by expectations of great new analytical insights. Such an inference is in fact well founded. The advantages of a cash flow statement correspond to the shortcomings of the income statement and, more specifically, the concept of profit. Over time, profit has proven so malleable a quantity, so easily enlarged or reduced to suit management's needs, as to make it useless, in many instances, as the basis of a fair comparison among companies.

An example of the erroneous comparisons that ...