The perception of shareholders with regard to cash flow accounting

Abstract

This study attempts to analyse the perception of local shareholders with re-gard to various aspects of the cash flow statement. It aims to provide valuable information about the level of awareness and importance given by shareholders to these different aspects.

Primary data used for this research was obtained through a questionnaire which was sent to 330 shareholders. 96 responses were received of which 84 were used in this study. The sample of shareholders was randomly selected from the shareholders list of Simonds Farsons Cisk plc and Go ple.

This study reveals that shareholders consider the cash flow statement as useful for the purpose of making and evaluating their investments. ‘This is especially so when the cash flow statement is used together with the information provided by the other financial statements as the combination of this information facilitates the users’ evaluation regarding the company’s performance and liquidity position.

As required by IAS 7, the cash flows of a company should be presented in three main activities. The results of this study show that all these activities are important to the shareholders. However, the most important one is cash flows from operating activities. The results also indicate that the majority of these users prefer this activity to be prepared using the indirect method because they find this method to be more useful in decision making. It is noted, though, that these users are not aware of the useful information presented by the alternative method, that is, the direct method.

This study also notes that shareholders perceive the cash flow statement as being relevant for a wide range of decision contexts, indicating that the cash flow statement is powerful due to its versatility. However, these users use the cash flow statement mostly for liquidity and solvency evaluation of the company. Notwithstanding, the results indicate that the majority of the respondents still use net income as the primary criterion to evaluate their investments. It is ironic that the number of respondents who make use of the cash flow statement is quite low when considering that most of the respondents emphasised that cash is king and that there should be enough cash to pay their dividends. Shareholders are also somewhat aware of the susceptibility of the income statement to creative accounting.

This study exposes the fact that shareholders are aware of the useful information presented by the cash flow statement and that they also make use of this information to a certain extent. The study recommends that seminars should be organised for local shareholders in order to promote further the use of this statement for economic decision making.