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Explain the limitations of the traditional accounting architecture that make it difficult to directly trace the cash flows of an organization. [With regards to the Financial Accounting Standards Board (FASB)]

The Financial Accounting Standards Board (FASB) indicated that the traditional accounting information system design actually constrained standard setting in FASB Statement 95, "A Statement of Cash Flows." The Board received 450 comment letters, most from bank lending officers-accounting information users-who favored requiring the direct method for the cash flow statement. Corporation accountants, on the other hand, favored the indirect method due to excessive implementation costs. They appealed to the Board because they could not currently obtain gross operating cash receipts and payments directly from their accounting systems. The FASB decided to allow both the direct and indirect methods, largely due to design limitations of traditional accounting systems.

a. Explain the limitations of the traditional accounting architecture that make it difficult to directly trace the cash flows of an organization.

b. Did FASB respond properly to accounting's information customers? Justify your response.

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A) Cash flows can be projected, monitored and controlled, but it is difficult to directly trace the cash flows of an organization when the timing of a cash flow is so critical. There can be cash shortages which may be hard to trace due to the lack of receivables or receivable information that is timely. Also, expenses such as the purchasing of equipment may be hard to trace if ...

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