Users' perceptions of the need for cash flow statements — Australian evidence

Abstract

Professional accounting bodies have endorsed claims of the need for cash flow information through their issuance of Standards on cash flow statements. Few empirical studies have tested the extent to which decision-makers actually use cash flow information. Whilst market-based studies have tested the reaction of the stock market to the release of cash flow information, they have not established the usefulness of cash flow information to financial statement users. Such a study is important not just for the signals it gives to regulators, but also by virtue of the importance those signals have for the preparers of accounting information. The academic and professional literature, identify four possible contributing factors of demand for cash flow information: (i) the limitations of conventional accrual accounting, (ii) dissatisfaction with the funds statement, (iii) relevance for users' decisions, and (iv) changes in the reporting environment. To determine the extent to which investors and creditors agreed with these factors in favour of publishing cash flow data, a survey was conducted of workers in the finance industry in Australia. The results support the claims made in the academic and professional literature as to the need for cash flow information. Cash flow statements have become important sources of information for users. They have not, however, replaced the conventional income statement and balance sheet. All three financial statements are considered to be complementary.