B analyze and describe the following ways to manage or manipulate the cash flow statement: stretching out payables, financing of payables, securitization of receivables, issuing stock options, and using stock buybacks. Flashcards Preview

L1 34 Shenanigans on the Cash Flow Statement > B analyze and describe the following ways to manage or manipulate the cash flow statement: stretching out payables, financing of payables, securitization of receivables, issuing stock options, and using stock buybacks. > Flashcards

Flashcards in B analyze and describe the following ways to manage or manipulate the cash flow statement: stretching out payables, financing of payables, securitization of receivables, issuing stock options, and using stock buybacks. Deck (7)
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1
Q

Stretching out payables

A

(AP/COGS)365 [ days sales in payables]

Unsustainable

Increase CFO - essentially interest free financing

2
Q

Financing Payables

A

Reclassify AP as STdebt through a 3rd party financial institution:

Dec. AP dec.’s CFO but STdebt inc. CFF total CF is unaffected: usually takes place when CFO > CFF which may indicate negative CFO and negative CFO is usually financed by issuing debt or securities = unsustainable (when the external debt or securities run out, the firm must be able to generate a positive CF)

Remember: CFO’s reflect the everyday transactions, business of the firm

Acct: the transaction: AP decreases, STdebt incr. which leads to inc. CFF but dec. CFO (balances, no change)

3
Q

Securitization of Recievables

A

converting AR to Cash

Via collateral: Inflow as CFF
Via selling the receivable: Turns recievables to cash
Via securitizing the receivable: Recievable —> through SPE (special purpose entity) —> Cash (reported as a collection, cash inflow similar to sale - reported as CFO - not sust. as there are only a limited amount of AR
Securitizing AR and how it affects earnings: May be a gain (BV - FV)>Gains may be affected by: Expected default rate, expected repayment rate, discount rate. GAAP doesn’t care abut gains from securitization. INcluding G’s as R = aggressive

4
Q

Issuing Stock Options

A

At time stock options are granted no CF effect is recorded as the grant is a non-cash transaction.

When options = exercised, firm gets a tax deduction (taxes payable are decreased in that future period, but tax deductions are unsustainable as T’s could go up in future. )

T’s increase operating CF

5
Q

Using Stock Buybacks (Repurchasing stock to offset dilution)

A

Stock option exercised>Shares issued>dilutes EPS

Cash received from the exercise of the option and the outflow of cash from the share repurchase are both reported as Fin. Acti. in the CFstmt. - there is a T benefit when Options are exercised, exercise increases CFO

6
Q

Accounts payable

A

An obligation to pay a short-term debt to creditors

7
Q

Analytical purposes as to ID’ acct, shenanigans

A

Stock repurchase (net cash outflow for share repurchases to avoid dilution) –>Reclassify from financing activities to operating activities

Employee stock options = compensation so analyst should subtract the cash outflow from CFO to recognize the ‘true’ cash costs of options-based compensation.