Jurnal Umum
On the Analysis of Firms' Cash Flows
Analysts generally view the income statement as the centerpiece of fínancial
reporting. It supplies the primary data in the forecasting of subsequent periods'
earnings. To appreciate the primary data, analysts must assess the impact of the
underlying accounting principles on reported eamings: not all components of eamings
have the same predictive consequences. Of particular concern is the distinction
between accruals and cash flows. Its mix influences the perceived "quality of
eamings".' To sort out the effect of accruals versus cash flows and the quality of
eamings, analysts naturally tum their attention to the statement of cash flows.2
Any attempt to assess a firm's quality of eamings through an analysis of generally
accepted accounting principles' (GAAP's) statement of cash flows gives rise
to new questions. First, it is unclear whether GAAP's narrow concept of cash is relevant.
Second, the dichotomy between operating and financial activities is arguably
too arbitrary. (An increase in accounts payable could be viewed as a financing
rather than as an operating activity.) More generally, GAAP's way of assigning
transactions to the three major categories (operating, investing, financing) can be
challenged and second-guessed.^
Setting aside these classification problems, equity analysts still face a more
basic issue. Unlike the income statement, the GAAP statement of cash flows lacks
a bottom line. While there seems to be a general consensus that "cash from operations"
should provide the starting point, it is far from clear what analysts are
supposed to do next. Neither textbooks nor practice provide much of a guide. In
other words, analysts lack access to a roadmap that takes them from the beginning
of a cash flows analysis to the end. And the end ought to indeed correspond to a
bottom line, in a spirit no different from the way eamings correspond to a bottom
line for the income statement. With such a cash flow bottom line, one can proceed
to assess the quality of eamings and estimate eamings on a recurring basis.
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