The preparation of cash flow statements is required by generally accepted accounting principles. This accounting standard was initially adopted by a four-to-three vote of the FASB. Several members of the Board took exception to various aspects of the statement, including (1) the classification of interest and dividends received and interest paid as cash flows from operations and (2) the use of the indirect method.
Required:
Obtain a copy of Statement of Financial Accounting Standards No. 95 (FAS 95) from the FASB website. This can be obtained by: (1) entering the following web address in your browser: www.fasb.org, (2) highlighting the ‘‘Standards’’ tab at the top of the screen and selecting ‘‘Pre-Codification Standards’’ from the menu, (3) selecting ‘‘Statement of Financial Accounting Standards No. 95,’’ and (4) clicking on the ‘‘As Issued’’ link.
1. How did dissenting members of the FASB prefer that interest and dividends received and interest paid be classified? (See the section following paragraph 34 of the full text of Statement No. 95.) How did the FASB justify classifying these items as cash flows from operations?
2. Why did dissenting members of the FASB take exception to the indirect method? (The section following paragraph 34 of the full text of Statement No. 95.) How did the FASB justify permitting use of the indirect method? (See paragraphs 108, 109, and 119 of Statement No. 95.)