G. H. Lawson, Ed., Studies in Cash Flow Accounting and Analysis (Aspects of the Interface between Managerial Planning, Reporting and Control and External Performance Measurement) (New York: Garland Publishing, Inc., 1992, 315 pp., $63).
Reviewed by Kathryn A. S. Lancaster Texas A&M University
The book is a collection of 14 papers that reflect a long-standing interest of Dr. Gerald Lawson in cash flow accounting/ analysis (CFA) and provide insight into the development of the Statement of Cash Flows as it is currently presented. Since Dr. Lawson has taught at the University of Manchester in England, a number of his papers are written from an United Kingdom accounting methodology standpoint. Some of the papers do not stand alone, which makes the glossary of symbols included at the end of the book a helpful tool to refer to while reading the papers. The papers focus on the measurement of the creation of ownership value inherent in cash flow market value accounting an span a decade from 1981 to 1992. At the time Dr. Lawson began examining CFA, the U.K. Accounting Standards Committee (ASC) advocated a fund flow of the following form in SSAP 10:
Sources of Funds = Applications of Funds
where sources came from operating activities, the sale of assets, loans raised, and equity shares issued. Applications of funds went towards assets acquired, taxes paid, loans repaid, and dividends paid. Dr. Lawson believed the above approach led to the "erroneous impression that funds generated from operations constitute part of a pool which, at management's discretion, can then be deployed in alternative uses including periodic working capital investment"
. To correct for this perceived muddying of the water, he proposed the following identity, which is a reorganization and reclassification of the information included in the fund flow statement:
ENCF = LCF + SHCF
where ENCF is entity cash flows, LCF is lender cash flows, and SHCF is shareholder cash flows. In this form, the user would be able to identify the source of funds as being generated by the entity or by investing/financing activities more readily. This basic identity formula is expanded on in several of the papers, with the most straightforward explanation being provided in Paper 8, "The Valuation of a Business as a Going Concern."
This reader recommends beginning with Paper 12, "Call for SSAP 10 Reform." This paper provides the motivation for the studies and cases included in the other 13 papers and helps make sense of some of the other papers. Also, any unfamiliarity with U.K. accounting standards is mitigated by reading the papers in the order outlined. The papers all focus on the use of Lawson's proposed cash flow identity that facilitates analysis of management decisions and corporate performance. The motivation is further clarified in Papers 9 and 10, each a case study of a firm that experienced financial difficulty in the late 1970s or the early 1980s. In Paper 9, "Was Woolworth Ailing," Dr. Lawson examines Woolworth's cash flows and concludes that entity generated cash flows did not cover dividend payments, lender's contributions did. This resulted in an increasing debt to equity ratio, which Lawson believes was the basis of Woolworth's difficulties. He speculates if CFA via the Lawson model had been employed by the firm, both management and shareholders would have realized dividends based on historical levels were not feasible, and that cash flows generated by operating activities were not sufficient to cover the dividends. Paper 10, "Why the Current UDS Takeover Bids Became Inevitable," presents the same type of analysis for a firm that did adjust dividends for reduced revenue. …