The Quality of Reported Cash Flows

Cash flows are sometimes viewed as higher quality than earnings. But cash flows can also be of doubtful quality. Here are some examples:

• Firms can delay payments to generate cash flow
• Firms can sell receivables to generate cash flow
• Firms can reduce advertising expenditures to generate cash flow
• Firms can reduce R & D expenditures to generate cash flow
• Non-cash transactions are not in reported cash flows
• Structured financing can make borrowing look like cash from operations
• Capitalization policy shifts cash outflows from cash from operations to cash investment