Add the Financial Times Lex column (subscription required) to the growing chorus of voices suggesting—strongly—that FASB and the IASB require the direct method be used to compile cash statements. The direct method, notes Lex, is "intuitive and virtually impossible to manipulate—perhaps why many companies dislike it."

A case in point is the floor plan financing that companies with financing arms—such as Harley Davidson, Ford, GM, Caterpillar and others—provided to their dealerships. The SEC recently forced these companies to change the way they recorded the cash flows from those transactions after criticism from accounting professor Charles Mulford of the Georgia Institute of Technology (a regular contributor and adviser to CFO).

In the past, these companies would take back notes receivable instead of accounts receivable for sales. Under the indirect method, this looked like a cash inflow from the dealer that was subsequently invested in the investing section of the cash flow statement. "The appearance is they've made a sale, they've collected the money, and invested the money in notes receivable," Mulford told me back in January. "Under the direct method," Mulford explained at the time, "I'm convinced they could not show it as cash collected from the customer because they have not collected it."

On a somewhat related note, notice that although the SEC did subsequently force these companies to "reclassify" the way they record these transactions (as operating cash flows), it did not require restatements. Contrast that with the rash of lease accounting restatements which some pundits, including me, have mistakenly attributed to the clarification letter issued by the SEC's Office of Chief Accountant. In fact, the restatements were driven by the audit firms involved (initially, just KPMG). Only once KPMG began forcing clients to restate, and Deloitte also caught the bug, did the SEC's office of Chief Accountant issue a clarification that set off a further wave of restatements.