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It is generally said by most of the investors that the cash flows are relatively more important than the accruals. Before taking the investment decision in particular shares, the investors focus on the cash flow statement more as compared to other financial statements such as; profit and loss account and the balance sheet. One of the reasons they assume of superiority of cash flows over accruals is that“Cash flows can not be manipulated” and thus show clear and fair results of the different activities of the business pointed out by the investors.
 
Considering the above underlined statement as FALSE, List down four ways in which cash flows in a cash flow statement can be manipulated.
 

Note:
Be concise and to the point. Your answer should be in “four” bulleted points and no detail is required.

 

 

 

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Tariq bhi today is the last day of submission
FIN622 GDB Discussion it’s not a solution

It is generally said by most of the investors that the cash flows are relatively more important than the accruals. Before taking the investment decision in particular shares, the investors focus on the cash flow statement more as compared to other financial statements such as; profit and loss account and the balance sheet. One of the reasons they assume of superiority of cash flows over accruals is that “Cash flows can not be manipulated” and thus show clear and fair results of the different activities of the business pointed out by the investors.

Considering the above underlined statement as FALSE, List down four ways in which cash flows in a cash flow statement can be manipulated.


Note:
Be concise and to the point. Your answer should be in “four” bulleted points and no detail is required.


Pick four points according to your knowledge from given idea’s


Solution taking idea 1:

Overview of the Statement of Cash Flows
the statement of cash flows for non-financial companies consists of three main parts:
• Operating flows - The net cash generated from operations (net income and changes in working capital).
• Investing flows - The net result of capital expenditures, investments, acquisitions, etc.
• Financing flows - The net result of raising cash to fund the other flows or repaying debt.
By taking net income and making adjustments to reflect changes in the working capital accounts on the balance sheet (receivables, payables, inventories) and other current accounts, the operating cash flow section shows how cash was generated during the period. It is this translation process from accrual accounting to cash accounting that makes the operating cash flow statement so important.

Accrual Accounting vs. Cash Flows
The key differences between accrual accounting and real cash flow are demonstrated by the concept of the cash cycle. A company's cash cycle is the process that converts sales (based upon accrual accounting) into cash as follows:
• Cash is used to make inventory.
• Inventory is sold and converted into accounts receivables (because customers are given 30 days to pay).
• Cash is received when the customer pays (which also reduces receivables).
There are many ways that cash from legitimate sales can get trapped on the balance sheet. The two most common are for customers to delay payment (resulting in a build up of receivables) and for inventory levels to rise because the product is not selling or is being returned.

For example, a company may legitimately record a $1 million sale but, because that sale allowed the customer to pay within 30 days, the $1 million in sales does not mean the company made $1 million cash. If the payment date occurs after the close of the end of the quarter, accrued earnings will be greater than operating cash flow because the $1 million is still in accounts receivable.

Harder to Fudge Operating Cash Flows

Not only can accrual accounting give a rather provisional report of a company's profitability, but under GAAP it allows management a range of choices to record transactions. While this flexibility is necessary, it also allows for earnings manipulation. Because managers will generally book business in a way that will help them earn their bonus, it is usually safe to assume that the income statement will overstate profits.


An example of income manipulation is called "stuffing the channel" To increase their sales, a company can provide retailers with incentives such as extended terms or a promise to take back the inventory if it is not sold. Inventories will then move into the distribution channel and sales will be booked. Accrued earnings will increase, but cash may actually never be received, because the inventory may be returned by the customer. While this may increase sales in one quarter, it is a short-term exaggeration and ultimately "steals" sales from the following periods (as inventories are sent back). (Note: While liberal return policies, such as consignment sales, are not allowed to be recorded as sales, companies have been known to do so quite frequently during a market bubble.)

The operating cash flow statement will catch these gimmicks. When operating cash flow is less than net income, there is something wrong with the cash cycle. In extreme cases, a company could have consecutive quarters of negative operating cash flow and, in accordance with GAAP, legitimately report positive EPS. In this situation, investors should determine the source of the cash hemorrhage (inventories, receivables, etc.) and whether this situation is a short-term issue or long-term problem.


Cash Exaggerations


While the operating cash flow statement is more difficult to manipulate, there are ways for companies to temporarily boost cash flows. Some of the more common techniques include: delaying payment to suppliers (extending payables); selling securities; and reversing charges made in prior quarters (such as restructuring reserves).


Some view the selling of receivables for cash - usually at a discount - as a way for companies to manipulate cash flows. In some cases, this action may be a cash flow manipulation; but I think it is also a legitimate financing strategy. The challenge is being able to determine management's intent.

Cash Is King

A company can only live by EPS alone for a limited time. Eventually, it will need cash to pay the piper, suppliers and, most importantly, the bankers. There are many examples of once-respected companies who went bankrupt because they could not generate enough cash. Strangely, despite all this evidence, investors are consistently hypnotized by EPS and market momentum and ignore the warning signs.


The Bottom Line

Investors can avoid a lot of bad investments if they analyze a company's operating cash flow. It's not hard to do, but you'll need to do it, because the talking heads and analysts are all too often focused on EPS.

===============================================================

Solution taking idea 2:

Unlike the many ways in which reported earnings can be presented, there is little a company can do to manipulate its cash situation. Barring any outright fraud, the cash flow statement tells the whole story. The company either has cash or it does not. Analysts will look closely at the cash flow statement of any company in order to understand its overall health.
PARTS OF THE CASH FLOW STATEMENT
Cash flow statements classify cash receipts and payments according to whether they stem from operating, investing, or financing activities. A cash flow statement is divided into sections by these same three functional areas within the business:
• Cash from Operations—this is cash generated from day-to-day business operations.
• Cash from Investing—cash used for investing in assets, as well as the proceeds from the sale of other businesses, equipment, or other long-term assets.
• Cash from Financing—cash paid or received from issuing and borrowing of funds. This section also includes dividends paid. (Although it is sometimes listed under cash from operations.)
• Net Increase or Decrease in Cash—increases in cash from previous year will be written normally, and decreases in cash are typically written in (brackets).
Although cash flow statements may vary slightly, they all present data in the four sections listed here.
CLASSIFICATIONS OF CASH RECEIPTS AND PAYMENTS
1. Cash from Financing
2. Cash from Investing
3. Cash from Operations
4. Methods of Preparing the Cash Flow Statement
No Tariq Bhai............your solutions are not perfect.
Kindly read noting point given within GDB that
Be concise and to the point. Your answer should be in “four” bulleted points and no detail is required.
Tariq bhai we have to submit only four bulleted points as a answer but mention that no detail is required because it is not a Assignment, it is a GDB yarrrrrrrr.....
yar ma nay ya material diha tha k ap is ma say khud four line ka bana lu . ok na :-)
hmmmm........ pehle ye likhna tha na k ye material ha warna apko tu pata ha k buht se students bus copy paste krke submit krdte ha so be carefull next time.....

wase tariq bhai ek suggestion ha sab members ka mobile nbr lele aur ek mobile service start krn. loadsheding k hote hoe ye alternative help hogi for alerting about new updates.....whats ur idea ?

Regards,
Yasir Qureshi
mc090202793@vu.edu.pk
Cell: 0333-757566
FIN622 GDB Solution


 Companies can bulk up their statements simply by changing the way they deal with the accounting recognition of their outstanding payments, or their accounts payable.
 Another way a company might increase operating cash flow is by selling off its accounts receivable. This is also called scrutinizing.
 A subtler steroid is the inclusion of cash raised from operations that are not related to the core operations of the company.
 Also a subtle form of doping, we have the questionable capitalization of expenses.
plz send me sol of gdb today is last day
Tariq Bhai, plz help us. you are our best supporter, Allah bless you always
tariq para manu wi send kr dawo kukay aj last date wa. i hope you will send to me. ok thanks
please also send me the solution
pls upload the assignment time is runing
Case 1 = Conglomeration
Case 2 = Vertical Merger
Case 3 = Purchase Merger
Case 4 = Horizontal merger

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