Accounting Shenanigans on the Cash Flow Statement

Question 1

What can an analyst infer from a company stretching accounts payable?

Answer 1

1. Operating cash flow is unsustainable.
2. Suppliers may refuse to extend additional credit because of the slower payments.

Question 2

How is stretching accounts payable identified?

Answer 2

By increases in the number of days in payables.

Question 3

How can a firm decrease operating cash flows in a period of seasonally high CFO and increase them in a subsequent period?

Answer 3

Arranging for a third party to finance (pay) a firm’s payables in one period, so that the firm can account for repayment as a financing (rather than operating) cash flow in a later period.

Question 4

What is securitizing accounts receivable?

Answer 4

• Securitizing AR accelerates operating cash flow into the current period,
• Not sustainable
• Artificially increases receivables turnover.
• Also allows the firm to immediately recognize gains in the income statement.