The Working Capital Basis: Testing The Concealment And Cost Hypotheses

Abstract

This paper investigates the validity of two hypotheses concerning the use of the working capital definition of funds in the Funds Statement. Statistical tests do not support the hypothesis that the working capital basis is used to conceal potentially damaging information. However, there is evidence that smaller companies avoid switching to the cash basis because of the costs involved. Thus, the FASB’s proposed Statement of Cash Flows, if adopted, would affect smaller companies most.