Cash Flow Statements: Are they Important in Business Simulations?

Developments in Business Simulation and Experiential Learning, Volume 25, 1998
Cash Flow Statements: Are they Important in Business Simulations?
Kenneth R. Goosen, University of Arkansas at Little Rock

INTRODUCTION
preparation steps. First of all, the standard cash flow

chapter requires that all students have a solid knowledge
The purpose of this paper is to address three fundamental
of financial statement fundamentals. This condition is
questions: I. Should business game participants be seldom met. Secondly, the class time devoted to this
expected to have the skill and knowledge to prepare the
chapter, which is usually one week or less, is inadequate
cash flow statement, even after completing courses in
for even the best students to acquire any in-depth
accounting and finance? 2. Is the expression, “cash flow
understanding. Third, the preparation of the cash flow
statement” ambiguous in meaning? 3. Does the statement requires the computation of some important
preparation of the cash flow statement improve the adjustments which are needed to convert the accrual
quality of simulation decision-making?
basis balance sheet items to a cash basis. The purpose or

reason for these adjustment is not always understood.
In accounting courses, two types of cash flow statements

are presented: The historical cash flow statement and the
Another major problem is that two quite different formats
projected or pro forma cash flow statement. When are taught for presenting the cash flow statement, the
students reach senior status and are taking their capstone
direct and indirect method as they are generally called.
courses, a common complaint is that they do not Adjustments are required for both the direct method and
understand or have the ability to prepare cash flow
the indirect method; however, only the indirect method
statements.
shows the adjustments on the statement itself.


HISTORICAL CASH FLOW STATEMENTS
The indirect method (a popular method with professional

accountants) starts with net income which requires
The reason students have difficulty in learning how to
various adjustments in order to arrive at the correct fund
prepare the historical cash flow statement can in part be
of cash from operating activities. Students find the
attributed to: (1) the way in which the cash flow indirect method more difficult to comprehend. The
statement is taught in accounting and finance courses,
reason for showing adjustments in the cash flows from
and (2) the failure to recognize that there are two entirely
operating activities section is not easy to understand,
different types of cash flow statements based on two
even if explained well. Also, the time between
distinctly different processes for preparing the statement.
completion of the second course in principles of

accounting and the enrollment in a course that requires a
The term “cash flow statement” may refer to a projected
business enterprise simulation may be several years. In
(budgeted) cash flow statement or a historical cash flow
this span of time most students will have forgotten how
statement. It is important when discussing the cash flow
to prepare the cash flow statement.
statement to make clear which type is the subject of

discussion. The format of these two types of statements
At the principles level, the primary teaching objective is
and the processes for preparing them are fundamentally
to acquaint students with class flow concepts and give
different.
students some exposure to the mechanics of preparing the

statement. Development of preparation skill is not a
Preparation of the historical cash flow statements primary objective. Even if students were able to acquire
requires understanding and following some rather and retain considerable skill in preparing the cash flow
detailed procedures The problem is that students find it
statement, it still would be contended in this paper that
difficult to master the procedures necessary for preparing
students should not be required to prepare historical
the statement. The steps required to convert accrual basis
based cash flow statements. Manual preparation of
values to a cash basis are rather formidable for many
historical cash flow statements by business game
students.
participants does not contribute to the making of better

simulation decisions. Also, most simulation programs
There are several reasons why students experience
difficulty in learning and applying the required

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Developments in Business Simulation and Experiential Learning, Volume 25, 1998
automatically generate historical cash flow statements.
Policy Game, (Cotter & Fritzsche, 1995) and The
Ability to prepare these statements is, therefore, generally
Multinational Management Game (Keys & Wells, 1997),
unnecessary
are simulations of manufacturing operations. Therefore,

the profit planning process must involve planning
PROJECTED CASH FLOW STATEMFNT
production and the related cost of production costs. The

preparation of a profit plan for a manufacturing business
Cash flow statements based on historical transactions
requires that the students have a basic knowledge of the
are basically irrelevant to the internal decision-making
accounting principles for a manufacturing business.
process. However, the ability to prepare a projected cash
Students as a whole have a much weaker understanding
flow statement should be helpful in making decisions.
of manufacturing accounting than the accounting for a
Preparation of the projected cash flow statement must be
merchandising business. The less than adequate
based on decisions already made. The intrinsic nature of
understanding of the accounting for a manufacturing
total enterprise simulations requires understanding the
business also contributes to the inability of students to
process of business budgeting (profit planning) which
prepare the cash flow statement.
includes the projected cash flow statement.


BUSINESS SIMULATIONS AND PROFIT
The projected or pro forma cash flow statement in PLANNING
accounting courses is always presented in the framework

of profit planning or master budgeting. The prerequisites
Students who participate in total enterprise simulations
to the preparation of this type of cash flow statement is
are required to make marketing, production, and financial
the preparation of a total profit plan.
decisions. To the extent possible, the making of decisions

should be a thoughtful, analytical, and orderly process.
The complaint that students do not know how to prepare
The implementation of a formal profit planning process
a cash flow statement should also be a complaint that
provides an organized and effective methodology to
they do not understand the business budgeting process
decision-making. Students who are required to prepare
(profit planning). It is also a contention of this paper that
business budgets are compelled to recognize and work
the majority of business students are not being with various financial statement and decision
adequately taught the fundamentals of profit planning.
relationships. Of particular importance is the necessity to
Although most principles of accounting books contain a
determine both long term and short objectives that serve
chapter devoted to budgeting, it should not be assumed
as the foundation of the budgeting process. The
that this chapter is being taught or that the coverage is
foundation of a finished profit plan is a set of decisions.
sufficient to allow students to develop profit planning
In fact, until a set of tentative or final decisions has been
skills.
made, the budget cannot be completed. Also, the essence

of simulation play is decision-making. Therefore, the
Several reasons can be given as to why little attention has
relevance and importance of preparing profit plans in
been given to the chapter on profit planning in principles
simulation play is obvious and logical.
of accounting courses. Accounting faculty are, for the

most part CPA oriented and usually are inclined to skip
Whether or not formal planning results in improved
this chapter. Also, those instructors that consider this
decision-making performance has been a matter of
chapter on budgeting important often are unable to debate. Hornaday and Curran (1996) reported that their
devote more than one or two days to coverage. The
experiment in dividing teams into planners and
chapter on profit planning appears at the end of the book
nonplanners resulted in planners significantly out
and is usually scheduled for discussion near the end of
performing nonplanners. When the budget process is
the semester. Course material scheduled for coverage
based on careful analysis of data and thoughtful
towards the end of a semester tend to be omitted or
exploration of various decision options, then the
receive only scant of attention.
expectations of improved performance is reasonable. The

extent to which students voluntarily prepared or were
The ability to prepare a meaningful budget requires required to prepare profit plans in business simulation
considerable knowledge of financial statements. Most of
play and whether the preparation of the budgets actually
the business enterprise simulations such as the Business
affected the quality of decisions should be a fruitful area
Management Laboratory (Jensen, 1996), the Business
of research.

245

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Document Outline

• Table of Contents
• Author Index
• Volume 25, 1998
  • Marketing Goes to the Movies
  • Bringing Experiential Learning to a Principles of Marketing Course
  • Investment Analysis Application Using In-house Spreadsheet Models
  • SugarCoated Statistics: An Exercise for the First Day of Class
  • Improving Undergraduate Student Involvement in Management Science and Business Writing Courses Using the Seven Principles in Action
  • Establishment and Funding for Interuniversity / Multidisciplinary Student experiences
  • The Prospects of Creative Teaching: A Discussion with Patricia Sanders
  • The Simulation and Classroom Assessment Techniques
  • Developments of Management Skill Assessment
  • Games as Instruments of Assessment: A Framework for Evaluation
  • The Role of Artificial Intelligence in Business Curricula
  • Threshold Solo Competitor: A Management Simulation (V1.0) a Windows-Based. Play Alone, Total Enterprise Simulation and Assessment Instrument
  • Toward An Understanding of One's self-concept
  • Total Enterprise Simulations and the Internet: Improving Student Perceptions and Simplifying Administrative Workloads
  • The Expatriate an Assignment Orientation Game
  • An Expatriate's Nightmare: An Experiential Exercise in Coping with Overseas Assignments
  • Analyzing Experiential Exercise: Using the Scientific Method for Problem Solving
  • The Second Component to Experiential Learning: A Look Back at How ABSEL has handled the Conceptual and Operational Definitions of Learning
  • Predictive Models of Learning: Participant Satisfaction of Experiential Exercises in Business Education
  • Accelerating Moral Development through Use of Experiential Ethical Dilemmas
  • Ethical Dilemmas to use with Business Simulations to Teach Ethics
  • The Class Approach in Behavioral Simulation in a Business Policy/Strategic Management course: A Progression toward Greater Realism
  • An Exploration of the Emergence of Process Prototypes in a Management Course Utilizing a Total Enterprise Simulation
  • How Organizations Are Improving Their Performance Utilizing Electronic Commerce: Examples From The Internet
  • The Market Access Planning System (Maps): A Computer-Based Decision Support System For Facilitating Experiential Learning In International Business
  • An Excel Workbook For Student Planning And Interface With A Simulation Game
  • Design Of Multi-Media Based Pedagogy For Leadership Training
  • Panel Discussion On Using The Internet For Courses
  • Valuing And Enhancing Teaching: Sharing Tips Via The Web
  • The Buddy Project: A Semester Long Project Aimed At Developing An Appreciation For Diversity
  • Enhancing The Excitement And Learning Retention In The Classroom: The Power Of Magic
  • The Supervised Management Internship: A Job Or Learning Experience
  • Team Ware? An Online Moderated Class Discussion Facility And Beyond
  • A Neophyte Distance Educator's Experience
  • Learning Management By Practicing Management: A Report Of Significant Student Service In 1997
  • Integration Of Academic And Service Learning: Students' Perceptions About Its Effects And Outcomes
  • The Value Of Incorporating A Service Learning Component Into Course Content: A Presentation And Roundtable Discussion
  • Business Games Teach: Thoughts on the Sources of Conflicting Conclusions on their Effectiveness
  • Antecedents Of Learning In The Simulation: A Replication
  • Using Student Journals To Enhance Learning From Simulations
  • Technological Change And Intertemporal Movements In Consumer Preferences In The Design Of Computerized Business Simulations With Market Segmentation
  • Integrating The Marketing Curriculum Using Collaborative Learning
  • Teaching Time Management In A Sales Program: The Application Of A Computer Simulation Game
  • Adapting Interactive Computer Simulations For Content Based Esl Instruction
  • Multimedia And Student Expectations
  • Synthesizing Data For Media Simulations
  • Composing A Team
  • Health Promoting Behaviors-A Decision Making Exercise
  • Does it really Work? An Application of the Group Interaction Framework
  • Administering the MIT Beer Game: Lessons Learned
  • A Paperless Economy? Instructing Students on the Aspects of Successful Electronic Commerce
  • Maximizing Learning Gains in Simulations: Lessons from the Training Literature
  • Observing General Ability in a Total Enterprise Gaming Simulation
  • FReach Teach: A Computer-Based System for Teaching Advertising Media Planning
  • An Integrated Business Instruction System
  • An Experiential Exercise you can Tinker With
  • Experiential Exercises or Computer Simulations?
  • Cash Flow Statements: Are They Important in Business Simulations?
  • Holistic Cognitive Strategy in a Computer-Based Marketing Simulation Game: An Investigation of Attitudes Towards the Decision-Making Process
  • Barnga: A Game on Cultural Clashes
  • The Many Faces of Culture: Understanding Country and Corporate Culture
  • Students' View of the Use of Business Gaming in Hong Kong
  • Assessing General Management Interest
  • What is the Future of Business Gaming?
  • Starting a Small Music Trivia Business Exercise and Other Innovative Icebreakers
  • An Integrated Approach to Behavioral Skill Development
  • Career Focus: A Student and Business Learning Experience
  • The Use of Concept Mapping in Teaching Strategic Management
  • An Experiential Approach to Developing Mission Statements
  • Business Games in Brazil-Learning or Satisfaction
  • A Simulation within a Simulation: Job Layoff's and Emotional Reactions

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