How Cash Flow Standards Differ Between U S GAAP And

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. Introduction

Accounting is the language of business. It helps key stakeholder groups to better access the financial position of a company they are looking to engage with. This is critical as it relates to vendors, suppliers, customers, investors, governments, communities. For one, all of these stakeholders must trust that the organization will keep its promises and commitments. They must also protect their own downside risk as it relates to their ability and wherewithal to do business with the organization. Accounting standards help to answer a variety of questions including the investment worthiness of a company, the ability to determine if the company is worthy of a government contract, or to determine if a company is over leveraged. All of these circumstances are used to help mitigate risk, make better investment decisions. To do so however, the user of this financial information must have an understanding of generally accepted accounting principles and their impact on the financial statements presented by organizations

Unfortunately, creators of financial statements data understand the importance placed on them by third part users. As a result, they often use assumptions that are much more optimistic in order to indicate a much more favorable operating environment than the one that is prevailing. Likewise, in a particularly bad quarter management man optimistically take impairment charges to make the next few quarters look much more favorable. In addition, management can change assumptions related to pension returns, loan loss provisions, allowances for doubtful account, and many other line items in an effort to make consensus estimates or other financial data forecasts. This ultimately undermines the data being presented and causes confusion for unsophisticated financial statement users. As a result, it is critical to understand the differences between GAAP and IFRS standards in order to help lower the likelihood of making poor investment and financial decisions.

The standards discussed is this assignment will be that of the cash flow statement and how different classifications can only impact financial ratios but also discounted cash flow models. These standards is therefore important as it directly impacts the inputs used in valuations models by investors throughout the world (Ashbaugh, 2002).

2. Summary of the GAAP and IFRS standard

With intangible assets, under US GAAP intangibles are recorded at their cost. IFRS allows a business to utilize the fair value treatment. This created more variability with IFRS reporting as intangible assets can increase of decrease overtime depending on their value. This could potentially have a negative impact on earning particularly if the decline due to fair value accounting is steep.

Other IFRS standards provide companies with much more flexibility but also much more variability in operating results. For exle,…cash flow (OCF) is a critical input to free cash flow models. By being selective in the manner in which they classify items, OCF can be obscured and mislead investors (Barth, 1999).

4. Relate each standard to the relevant topic you learned in class

The cash flow standards are relevant to the efficient functioning of the markets as discussed in class. In order for markets to be efficient, confidence is needed in the both the system and financial data being presented. If trust is lost or there is a lack of confidence in the information being provided, then stock valuations may diverge from economic reality. As a result, investors must know and understand the various cash flow standards and how they can impact perspective returns and valuations.

5. Conclusion

Cash flow is one of the most important elements within a business. Being unprofitable but generating high levels of cash flow can be very helpful towards the long-term success of a business. As a result, understanding the various standards and how they impact cash flow is critical. This paper discussed various standard related to liabilities, assets, leases, property plant and equipment, and even revenue recognition. Each of these elements impact the larger standard of cash flow. As a result, it is important for investors to have a clear understanding as to the differences of both (Barton,…

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