Question

Identify possible ethical issues involved in preparing a statement of cash flows.

Answer 1

Inflating the Accounts Payable: Accountants cleverly write checks to payables usually in the last week of the accounting period and thus do not recognise the payment in books. By this the operating cash flow increases and the cash on hands looks higher.

Advantage of bank overdrafts: The GAAP recognises the overdrafts as accounts payable for cash flow statements. The business avails such overdrafts and presents it under payable, thus inflating the cash flow form operating systems activities and in hand balances.
Using the Non-operating cash items: Companies trade in shirt term marketable instruments and report the proceeds and investments as operating income and thus present higher operating cash flows rather than showing these under cash flows from Investing Activities.
Factoring and securitizing of receivables: Companies may sell the accounts receivables to factors and securitizing them and receive easy cash receipts. They do this especially at the end of the year such that accounts receivables are reduced and overall operating cash flows go up. In the subsequent years these instruments are redeemed or repurchased and the receivables are brought back to their original figures before the securitization or factoring.

Deliberately wrong recognition of receipt of Receivables: Accountants record payments receivable in
the subsequent fiscal years lying in the receivables as already received and thus reduce the receivables. This will include cash flows and cash balances.