Is Cash (the only) King? – A critical analysis of the relevance of Cashflow figures according to IAS 7

Abstract

When accountants or academics state „Cash is King“, they usually want to emphasize the practical relevance of Cashflow figures for external addressees of annual financial statements. In particular, Cashflow figures are considered relatively free from accounting policy measures and therefore appear to be particularly suitable indicators for measuring corporate success. Within this article, the actual relevance of Cashflow figures according to IAS 7 is evaluated. For this purpose, the influence of accounting policy measures on Cashflow figures according to IAS 7 is assessed. In addition, literature is examined that directly compares the ability of Cashflow figures and earnings figures to represent the success of a company. An important result of this article is that companies reduce the informative value of their Cashflow statement, when they decide to use the indirect method for the Cashflow from operating activities. For this reason, an obligation to use the direct method, when presenting the Cashflow from operating activities, would be desirable.

Keywords: IAS 7; Cashflow; Cashflow statement; accounting policy.