Do Cash Flows Reported by Firms Articulate with Their Income Statements and Balance Sheets? Descriptive Evidence from Finland

Abstract

This paper examines whether reported cash flows from operating, investing and financing activities coincide with corresponding cash flows estimated from firms' income statements and balance sheets. The findings obtained from a sample of listed Finnish firms for 1995-1997 are the following. (i) Non-articulation of reported cash flows with income statements and balance sheets is not solely an American phenomenon (Bahnson et al., 1996; Cheng et al., 1997), but can also be observed in Finland. In addition to operating activities, non-articulation is found for cash flows from investing and financing activities. (ii) From a statistical point of view, the differences between reported cash flows and cash flows estimated from income statements and balance sheets are mostly random. Consistently across operating, investing and financing cash flows, systematic differences attributable to bias or dispersion prove to be much less important. (iii) In the case of cash flows from operating activities, the findings indicate that differences attributable to operating income and working capital are, on average, opposite in direction and therefore tend to partially cancel each other out. (iv) Rank correlations of financial ratios based on reported and estimated cash flows are around +0.8 and suggest that non-articulation has, after all, a relatively small impact on firms? relative rankings. (v) A detailed analysis of the financial statements of an individual case company indicates that differences arising from the allocation of short-term liabilities to operating and financing activities can be important. Overall, the findings call for the refinement of the standards and guidelines of cash flow reporting practices. They have also implications for auditors regarding their opinion as to whether financial statements give a true and fair view of the financial position, performance and changes in financial position of an enterprise.