The usefulness of the statement of cash flows of listed companies

Abstract

Purpose: The aim of this study was to analyse the usefulness of the Statement of Cash Flows (SCF) from the viewpoint of the Maltese individual investors. This research set out to recognise the current use made of this statement by the individual investors, and their awareness of cash flow related concepts. The study then sought to identify the understandability of the Direct method (DM) and the Indirect method (IM) of presentation, as well as the impact on understandability from presenting these methods in the Maltese language. Design: This qualitative research started off with two focus group sessions consisting of eight individual investors each. Since the research was driven by analysis, further data collection was generated through fifteen semi-structured interviews, eight of which with individual investors and another seven with Chief Financial Officers or Heads of Finance amongst selected Maltese listed Entities. Findings: Most of the Maltese individual investors show an appreciation for cash related concepts and are aware of the importance of liquidity, warranting the consideration of the SCF. Nevertheless, the actual use of the SCF in practice is lacking, with a preference towards accrual-based information being evident. The reversed reasoning contained in the adjustments for non-cash items and working capital items within the IM leads to a lack of understandability within this method, yet it is less burdensome on the preparers and provides less competitive sensitive information. The DM’s categorised insight into an entity’s cash flows provides understandable information which is simple and concise yet value adding for the individual investors. Moreover, the Maltese version of the DM enhances understandability for a significant portion of the Maltese individual investors. Conclusions: This study concludes that the delivery of cash flow information to Maltese individual investors through the IM is flawed, whilst the DM improves the understandability of the SCF for the complete spectrum of the Maltese individual investors. The DM thus increases the likelihood that valuable information which has the potential to impact an investment decision is extracted from the SCF. Additionally, despite the financial world predominantly communicating in English, the Maltese language could increase the use of financial information for a significant portion of the Maltese individual investor population. Value: This study demonstrates the capacity to effectively communicate cash flow information by doing away with the IM, thus shedding light on the possibility of improving the usefulness of a currently overlooked portion of the annual report by the Maltese individual investors.