[Accounting]
1) Cash flows are divided into 3 types: operating, investing and financing. The quality of positive cash flows depends on the source of the cash. It is important to consider that, not only inventory, but also receivables can be used as collateral in a transaction that is reported as a sale, but is actually a loan.
2) The important issue which was mentioned in part B of Unit 4 is that when accounting entries are made, the cash is recorded as either a debit or credit, but the other side of the entry can be recorded anywhere the company chooses.
3) Using incorrect capitalization of operating costs, unexpected increase in capital expenditures, recording inventory acquisition as “investing” cash flows or “Investing” flows that look like operating expenditures can easily be an evidence that indicates a fraud in shifting financing cash outflows.
4) Many acquisitions, declining free cash flow, creative transaction structuring, buying less inventory, slow payment of vendors, large positive swings on the SCF is a clear proof that a company is boosting operating flows which leads to a fraud.
5) In part C of Unit 4 the most essential topic is metrics. When earnings are below expectations, management will focus on “modified” earnings metrics: EBITDA, Pro-Forma Income, Non-GAAP Income. There are some points to remember regarding metrics overstating performance: we should be cautious when a company ceases reporting a particular metric, look for “new” metrics not used before, beware of metrics that can be easily inflated and make sure the annual report and the 10-K agree (Schilit and Perler 2-36).
Works cited
Schilit, Howard and Jeremy Perler. Financial Shenanigans: How To
Detect Accounting Gimmicks & Fraud In Financial Reports. 3rd ed. 2010. Print.
