Categorizing for Clarity

Publish Date: 06-10-2021

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Source: Morgan Stanley

Author(s): Michael J. Mauboussin Dan Callanhan

Type: Article

Synopsis: Key takeaways: · The objective of financial statements is to help investors, creditors, and other interested parties understand the business. · The statement of cash flows is a relatively recent accounting statement, having been required in its current form only since 1988. · To be clear, negative free cash flow is not only fine but desirable when the return on investment is attractive. · Further, the basic structure of financial statements was developed to reflect a world of tangible assets and has not changed much in a century · Accountants record most intangible investments on the income statement. The essential adjustment is to move intangible investment from cash flow from operating activities, where it is hidden, to cash flow from investing activities. · Exhibit 7 summarizes all of the recommended adjustments and offers a brief rationale for each. · A final potential adjustment is to consider marketable securities as part of cash and cash equivalents. This affects cash flow from investing activities and means that the statement of cash flows is reconciling larger beginning and ending sums.

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