In the given situation, the financial statements of current fiscal year of SI. Inc., discloses that the net income per share is declined by 10% from last year. The statement of cash flows shows 20% increment of cash flow from operating activities, when compared with last year. The president of the company, Lucas Hunter and the controller of the company, John Jameson decided to show operating cash flow per share on income statement, under earnings per share to comfort their creditors.
The income statement shows only net income or net loss for the year ended along with earnings per share. The statement of cash flows of a firm shows cash flow from operating activities, investing activities and financing activities
But in the given situation President and controller decision to show operating cash flow per share on income statement, it is a misrepresentation and misleading of financial statements and it is unethical and not in professional manner, as it may influence the decisions of users of the financial statements and put the company in bad situation by financially as well as socially.
1. The principal disadvantage of the direct method is that the data may not be readily available in the accounting records and, thus, cost more to obtain.
Non-cash and non-operating incomes and expenses such as depreciation, Income/loss on sale of fixed assets, should be adjusted to net income and changes in current operating assets and liabilities are also to be adjusted to net income to arrive net cash flows from operating activities.
The United Continental Holdings reported a net loss of $723 million from operations and according to its cash flow statement, its cash flow from operating activities is $935 million.
The possible reasons for this apparent contradiction are as follows.
1. There might be huge amount depreciation on its fixed assets, which might be the reason for the contradiction between loss and positive cash flows.
2. Loss on sale of fixed assets also contributes to the reason for the contradiction.
3. Significant decrease in current operating assets and significant increase in current operating liabilities also might be the reasons for the contradiction.
Any one or all of the above would be the reasons for the apparent contradiction between the loss and positive operating cash flow.