Question

5.5 Manipulating the Statement of Cash Flows You are the company's chief financial officer. It is early December, and your accountants have produced financial statements showing provisional results for the year. (Your company's fiscal year ends on 31 December.) You show these to the CEO who then expresses concern about several figures. One figure in particular, cash flow from operations (CFFO), appears low. The CEO wonders if any- thing can be done before the end of the year to increase it. Which of the following actions will increase CFFO this year? Which of these actions do you consider appropriate, which are inappropriate, and why? a. The company sells €2 million of accounts receivable for 97% of face value to a bank. The receivables are sold "with recourse." which means that the company must reimburse the bank for any amount not collected beyond 3% of total receivables. b. Social charges are due on employees' wages at the end of the year. The firm can delay these payments by a few days so that they are made at the beginning of the following year. c. The company can work out a deal with some of its customers in which the customers buy goods now, for cash, but they can receive a full refund after the beginning of the next year. d. A training program is moved from the final month of the cur- rent year to the first month of the following year. e. Routine maintenance is delayed on machinery and equipment until early next year. f. The company delays the purchase of a new forklift until the beginning of next year.

Answer 1

Solution :

a,b,c,d,e would increase Cash Flow from operating activities of the company this year.

Point f would increase the investing activities

Appropriatness of transactions :

1. Point a is appropriate , the firm can sell its account recievable to get a better liquidity . 3% discounting can be accepted for early collection of the account recievable.
2. It is not appropriate to delay the social charges due on employees wages (unethical) to increase its operating cash flow
3. It is not appropriate to sell goods first and then refund it later to increase its operating cash flow..It is a complete misguide to the stakeholders and a major loss to the company.
4. It is not appropriate to delay the social charges due on employees wages to increase its operating cash flow
5. It may not be appropriate to delay the training program as the development of the employees get delayed and ultimately delay in development of the organisation
6. It is not appropriate to delay the routine maintainance of the machines as it effect the efficiency of the machines and the production capacity.