FR&A - Accounting Shenanigans on CF Statement

10:30 am

One technique is to reclassify financing cash flows as operating, and vice versa
Management also has discretion over timing of cash flows

Stretching accounts payable

• Delaying payments to suppliers - effectively no cost financing
• Not sustainable - suppliers can't allow it forever
• Examine number of days' sales in payables
• days' sales in payables = (AP / COGS) * days in period
• This is the number of days on average it takes a co to pay its suppliers

Financing accounts payable

• Entering into a financing agreement with a third party, usually a financial institution
• Allows firm to manage timing - delay an outflow of cash
• Example a mfg firm purchase raw materials on credit
• In indirect CF, operating cash flow not affected
• Increase in inventory (use) offset by increase in AP (source)
• When AP comes due, a financial institution makes the payment for the company
• Company moves liability from AP to short-term debt
• Makes CFO lower and CFF higher, but total cash flow is same
• Enables them to manage against high CFO - e.g. stabilise CFO
• When firm repays financial institution, outflow is from financing activity
• Financial institution will charge a fee to handle

Securitization of AR

• Converting AR to cash by borrowing against or by selling or securitizing AR
• When borrowing, cash flow is financing activity
• When securitized, AR are transferred to bankruptcy remote SPE
• SPE pools and sells securities representing an interest in the pool
• Treated just like a collection/sale - operating cash flow
• Essentially enables acceleration of collection
• Not sustainable because company has only limited amounts of AR
• Might also recognize gains on receivables - mkt value is higher than book
• GAAP does not tell where these gains should be placed on income statement
• Some firms are aggressive and report it as revenue
• Other firms reduce opex by the gains
• Some report gains as nonoperating income

Repurchasing stock to offset dilution

• Higher the stock price relative to exercise, more shares firm must issue, diluting EPS
• Firms buy back stock to offset dilutive effects of options
• Cash received from exercise and outflow from share repurchase are both financing activities
• There is a tax benefit when options are exercised - increases CFO
• Net cash outflow for share repurchases should be reclassified to CFO
• Employee stock options are part of compensation

11:00 AM

0.5 hrs