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    Can cash flows be easily manipulated? Argue both sides.

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    The Statement of Cash Flows

    Many users of the financial statements assert that the statement of cash flow is the most useful statement since companies preparing this statement cannot use creative accounting practices to create cash, and measures like free cash flow are used heavily in financial analysis. However, some opponents argue that rearrangement of certain items like dividends, prior period adjustments or capitalizing certain expenses permit manipulation of cash flow statement or preparing cash flow adequacy. Discuss whether each argument has merit. Please support your discussion with examples or research on this topic.

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    Solution Preview

    The statement of cash flow is not easy to manipulate:
    The amount of cash flows is not open to manipulation like some expenses and balance sheet items. In order to be reported on the statement of cash flows, the cash transaction must have already happened. As such, you cannot "estimate" cash. They are known amounts. While you can "estimate" warranty expenses on product you sold, an expense in the computation of profits, you cannot estimate cash spent on warranty repairs. The bank account activity, payments for spare part and labor to fix or replace broken products, is a known amount that is past and settled. It is not vulnerable to exaggeration or minimization. Therefore it is not easy to manipulate. Another example is depreciation ...

    Solution Summary

    Your tutorial gives argues that the cash flow amounts are difficult to manipulate but the timing of inflows and outflows is relative trivial to manipulate. The discussion is 435 words with eights examples to support the arguments for and against the comment that cash flows are "easy" to manipulate.

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