Free Cash Flow and Business Combinations

J. Edward Ketz, PhD

Cash flow statements began appearing in corporate reports almost 30 years ago, after FASB issued Statement of Financial Accounting Standards (SFAS) 95, Statement of Cash Flows, in 1987. Previously, business enterprises published a funds statement per APB Opinion 19, Reporting Changes in Financial Position, issued in 1971. The cash flow statement was a major improvement, as working capital flows are highly correlated with earnings and do not provide much information beyond the net income number. Cash flows, on the other hand, supply much-needed information about the liquidity and solvency of a corporation and act as an important adjunct for assessing earnings quality (Howard Schilit, Financial Shenanigans, 2nd ed. McGraw-Hill, 2002).