Engineers And The Cash Flow Puzzle

Most engineering curricula devote little time to the development of financial literacy among engineering students. Many civil and industrial engineers obtain some exposure in an undergraduate engineering economics course but these courses generally focus primarily on the time value of money and the comparison of alternatives based upon discounted cash flow. Even the ubiquitous topic of cash flows due to taxes is deferred until late in the course. Often projects are compared on the basis of pre-tax cash flows and students gain no appreciation for the fact that virtually all real world comparisons must be performed on an after-tax basis. They also encounter financial statements that they have difficulty interpreting, as they have not learned the accounting concepts that underlie their development. In the past decade, accounting standards have required that Cash Flow Statements accompany SEC filings and annual reports. Encouraged by their familiarity with the term “cash flow”, students who attempt to interpret these are in for a rude awakening. The construction of the cash flow statement bears little resemblance to what they have learned. The problem lies with the fact that cash flow statements develop historical annual cash flows from operations, financial and investment activity during the year and they, in effect; reverse the results of accrual accounting for operations. Understanding accrual accounting concepts that are seldom taught to engineers is key to comprehending the cash flow statement. This is no affront; even budding accountants struggle to grasp the subject. Resolving this dilemma, short of enrolling in Accounting 101, appears to be difficult at best. The first obstacle is developing competency in accrual accounting. Fortunately, there are expedient ways to do this. Kulonda 1 presents a rationale and an approach to developing a conceptual understanding in a few class sessions that could be added as a module to many classes. Adding specific coverage of cash flow statements enlarges that by only one session for mature and motivated students. This paper presents the case materials and supporting reference materials to achieve that end. The presentation will focus on using those materials to obtain the desired level of literacy.