Academic journal article Academy of Accounting and Financial Studies Journal

Nonarticulation in Cash Flow Statements: The Hong Kong Experience

Academic journal article Academy of Accounting and Financial Studies Journal

Nonarticulation in Cash Flow Statements: The Hong Kong Experience

Article excerpt


The purpose of this study is to determine if nonarticulation for individual accounts between the statement of cash flow and balance sheet is occurring for publicly traded companies in Hong Kong. One hundred and ninety annual reports were examined to determine if nonarticulation between the statement of cash flows and balance sheets exist for Hong Kong financial statements. One hundred and fifty-seven annual reports with a year ending in 1996 were selected for the study. Thirty-three annual reports for 1995 were selected for comparison purposes.

There is nonarticulation for many individual accounts related to cash flow statements for Hong Kong companies. Approximately eighty-six percent (135/ 157) of the companies had, at least one item (debtor, creditor, stock or interest), that the change in the balance sheet or profit and loss for interest accounts did not agree with the adjustment in the cash flow statement.

Future research is needed to determine the reasons for the Hong Kong nonarticulation. For this study, many of the differences remain unexplained. Practitioners need to be consulted to analyze the methods used by the preparers to help explain the reasons for the lack of articulation. If practitioners use a different method, then academic teaching approaches may need to be changed to reflect the actual procedures.

Keywords: cash flow statements, nonarticulation


The Hong Kong Society of Accountants (HKSA) issued Statement of Standard Accounting Practice (SSAP) No. 15, Cash Flow Statements, in September 1992. This statement superseded SSAP No. 4, Statements of changes in financial position. Per SSAP No. 4, funds were defined as working capital or cash. The new statement uses only a cash definition. The objective is "to require reporting entities as part of their financial statements setting out on a standard basis their cash generation and absorption for a period." (HKSA, 1992). Five categories are used to classify the changes. Net cash inflow or outflow from operations is highlighted and presented in the operating activity category. Two alternative approaches, direct and indirect, are allowed in this section.

The direct method presents operating cash receipts and payments. For example, collections from customers would be shown as a separate line item. In some cases, a company may not easily determine this information. The indirect method reconciles reported operating profit with the cash flow provided by operations. The direct method is encouraged, but not required by SSAP 15. Some believe the direct method is easier to understand and this presentation is more useful in predicting future cash flows. There is a cost to providing this information and in some cases these costs may outweigh the perceived benefits. Other users may believe the reconciliation used for the indirect method is critical in evaluating the quality of cash flows because of the usefulness of the accrual systems in helping predict the likelihood of future cash flows. In many cases, the usefulness of the indirect method may depend on the user's basic understanding of the accrual accounting system.

In a recent United States (US) study (Bahnson et. al., 1996), the changes in current accounts shown in the reconciliation using the indirect method between income and cash flow provided by operations for the statement of cash flows do not articulate with the corresponding changes in the balance sheets. In the United States, only three general categories, as compared to five in HK, are used according to Statement Number 95 (FASB, 1987). However, the direct and indirect methods for reporting the cash flow from operations are, also, used and the methods are similar for both the US and HK. The US system does not use separate categories for 1) returns on investments and servicing of finance and 2) taxation. For a large sample of US financial statements, the results indicated that in seventy-five percent of the sample, the changes in current accounts were not articulated with the respective balance sheets. …

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