Reverted to Cash Flow Rather Essay

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Based on a large sample of firms from different countries after adopting IASB cash flow accounting, firms evidenced "less earnings management, more timely loss recognition and more value relevance of accounting data" than firms without IASB standards (Morais & Curto 2008). The drive towards greater homogenization of international standards has lead the United States FASB (Financial Accounting Standards Board) to consider the IASB's call for a shift to cash flow methods for all organizations. The justification for this is that accruals are more subject to dishonest practices "since every accrual requires certain assumptions and estimates… when a firm completes a sale on credit, it must estimate the likelihood that the cash will be received, when the receipt will take place, and if full payment is uncertain, how much should be reflected on the income statement. None of these issues arise when the sale is for cash" and a firm cannot use assumptions and estimates to inflate profits ("Will global accounting rules help or hinder accuracy," Knowledge @ Emory, 2007).

However, cash flow accounting is not without its critics. Because "accrual account recognizes revenue and expenses in the period they occur, regardless of whether cash changes hands" it may be a better long-term picture of the state of the firm ("Will global accounting rules help or hinder accuracy," Knowledge @ Emory, 2007).

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Cash flow accounting can more easily be subject to shifts in the flow of receipts and payments, and a firm can choose to 'pack' its cash transactions into a particular period of time when it needs to maximize its impression of profitability. "If managers wish to distort results, they can boost cash inflows by simply delaying the purchase of supplies, or of interest-bearing, short-term securities, and can also delay paying whom they owe" ("Will global accounting rules help or hinder accuracy," Knowledge @ Emory, .

Neither system is perfect. Thus, a shift to cash flow accounting, although it seems likely, given the drive to adopt towards international accounting standards, is only an imperfect solution: a combined approach is likely the most accurate portrayal. "The value of information from financial statements arises from a combination of cash basis and accrual basis measures" ("Will global accounting rules help or hinder accuracy," Knowledge @ Emory, Although having international standardized accounting rules may make it easier to define accepted best practices within the profession, certain specific industries may be better suited to one method vs. another depending upon the nature of financing or seasonal changes in demand. Of the two methods, cash flow accounting may be less apt to be influenced by creative accounting techniques, but neither method is immune, and debates about accounting.....

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