Ethics discussion: Cash flow

Cash flow per share may appear to be a valuable measurement of the operating success of a business. However, it can be misinterpreted by users of the financial statements.

Linda Stern, president of Venician Fashions Inc., believes that reporting operating cash flow per share on the income statement would be a useful addition to the company’s just completed financial statements. The following discussion took place between Linda Stern and Venician Fashions’ controller, Ben Trotter, in January, after the close of the fiscal year.
Linda: I have been reviewing our financial statements for the last year. I am disappointed that our net income per share has dropped by 10% from last year. This is not going to look good to our shareholders. Isn’t there anything we can do about this?Ben: What do you mean? The past is the past, and the numbers are in. There isn’t much that can be done about it. Our financial statements were prepared according to generally accepted accounting principles, and I don’t see much leeway for significant change at this point.Linda: No, no. I’m not suggesting that we “cook the books.” But look at the cash flow from operating activities on the statement of cash flows. The cash flow from operating activities has increased by 20%. This is very good news—and, I might add, useful information. The higher cash flow from operating activities will give our creditors comfort.Ben: Well, the cash flow from operating activities is on the statement of cash flows, so I guess users will be able to see the improved cash flow figures there.Linda: This is true, but somehow I feel that this information should be given a much higher profile. I don’t like this information being “buried” in the statement of cash flows. You know as well as I do that many users will focus on the income statement. Therefore, I think we ought to include an operating cash flow per share number on the face of the income statement—someplace under the earnings per share number. In this way users will get the complete picture of our operating performance. Yes, our earnings per share dropped this year, but our cash flow from operating activities improved! And all the information is in one place where users can see and compare the figures. What do you think?Ben: I’ve never really thought about it like that before. I guess we could put the operating cash flow per share on the income statement, under the earnings per share. Users would really benefit from this disclosure. Thanks for the idea—I’ll start working on it. Linda: Glad to be of service.

How would you interpret this situation? Is Ben behaving in an ethical and professional manner?
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My Response:
Jill Stidd
17 Oct 08 11:47 AM MST

Unless there is a law that I could not find in regards to reporting operating cash flow per share it seems that it is a used ratio by those that evaluate all the financial reports. This is an explanation that I took off the U.S. Securities and Exchange website for earning per share. “Income statements also report earnings per share (or “EPS”).

This calculation tells you how much money shareholders would receive if the company decided to distribute all of the net earnings for the period. (Companies almost never distribute all of their earnings. Usually they reinvest them in thebusiness.)”
(http://www.sec.gov/investor/pubs/begfinstmtguide.htm)

I might be confused on this question, however if reporting earnings per share is ethical than I do not see why it would not be ethical to report operating cash per share if nothing has been “cooked”.This is a section off another website that I found in terms of the calculation to find cash flow per share. I might point out the header that states” that this calculation measures a firm’s financial strength.” I can see why Linda saw the importance of putting cash flow per share on the income statement. Again unless there is something that I do not know about adding random sections to the income statement than I would think what she has requested is logical.

A measure of a firm's financial strength, calculated as follows:However I also acknowledge because this EPS can be easily manipulated, it would be important to question its accuracy. “Many analysts, as well as some of the greatest investors of all time, place more weight on cash flow per share than earnings per share. Because EPS is more easily manipulated, its reliability can at times be questionable. Cash, on the other hand, is difficult - if not impossible - to fake. You either have cash or you don't. Therefore, cash flow per share is a useful measure for the strength of a firm and the sustainability of its business model.”
(http://www.answers.com/topic/cash-flow-per-share)

From all that I read in this question it seems to me that Linda only wanted to high light what was positive on her company’s reports. She was not changing any figures and she had to clearly show what had dropped. It seems that she was clear that she did not to “cook” the books and she reinforced that to her controller. I would have to say I do not see anything unethical about either one of them as long as they were not altering any figures and only reporting the actual figures from the year’s business.