The Predictive Ability of Direct Method Cash Flow Information Gopal V. Krishnan and James A. Largay III* 1. INTRODUCTION The Financial Accounting Standards Board (FASB), preparers of financial statements, users of financial statements such as the Association for Investment Management and Research (AIMR) and Robert Morris Associates (RMA), and academics have long debated the usefulness of the direct versus the indirect methods of presenting operating cash flows. 1 SFAS 95, Statement of Cash Flows (1987), which permits the use of either method, passed by a 4±3 vote. Board members Lauver and Swieringa dissented, believing that by permitting continued use of the indirect method, the Board missed an opportunity to make a significant contribution to the quality of financial reporting and enhanced user understanding of operating cash flows. Most respondents to the FASB's exposure draft, primarily commercial lenders, asked the Board to require use of the direct method. They argued that the direct method is more consistent with the objective of a statement of cash flows Ð to provide information about cash receipts and cash payments Ð than the indirect method, which does not report operating cash receipts Journal of Business Finance & Accounting, 27(1) & (2), January/March 2000, 0306-686X ß Blackwell Publishers Ltd. 2000, 108 Cowley Road, Oxford OX4 1JF, UK and 350 Main Street, Malden, MA 02148, USA. 215 * The authors are respectively Associate Professor of Accounting at the School of Management, George Mason University, Fairfax, Virginia; and Arthur Andersen & Co. Alumni Professor of Accounting, Lehigh University, Bethlehem, Pennsylvania. This research is partially supported by Central Grant No. 351/557 of the Hong Kong Polytechnic University, awarded to Visiting Associate Professor Krishnan. The authors appreciate the helpful comments of Eugene Imhoff, William Scott, and Geraldo Vasconcellos. (Paper received March 1999, revised and accepted April 1999) Address for correspondence: James A. Largay III, Arthur Andersen & Co. Alumni Professor of Accounting, Lehigh University, 621 Taylor Street, Bethlehem, PA 18015-3117, USA. e-mail: jal3@lehigh.edu