Question

Respond to the following in a minimum of 175 words PLEASE TYPE RESPONSE:

What are three main things to look out for in detecting cash flow manipulation?

Answer 1

CASH FLOW MANIPULATION

- WHAT IS CASH FLOW MANIPULATION

Accountants sometimes makes misstatements, or frauds/manipulate cash flow to make it appear higher than the actual. It is done for the better ratings and lower interest rates, since the efficient or higher cash flow indicates the financial strength and stability of organization.

- THINGS TO LOOK OUT FOR IN DETECTING CASH FLOW MANIPULATION

• Trading of investments should be taken care. The purchasing and selling of investments held for trading must be included in the operating cash flows of business. Cash flow from investing activities includes longterm uses of cash. The purchase of fixed assets would be an investment activity. Negative cash flow from investment activities is due to significant amounts of cash being invested in to the long term stability or benefit of company.   
• Next thing is expenses , that are inappropriately capitalized. Because of it's nature it will not included in the cost, appear as a capital expenses. Through the calculation of free cash flow, one can easily rectify this expense.   
• Tax is yet another thing should be taken care of. Companies can get a tax relief from the share options, which is concerned with the complicated rule. This item should be included in the operating cash flow of business, but removed to acquire actual sense of the earning power of company. In the operating cash fow, tax paid on sale of investments will be included, but it should not as a non-recurring expense.