Reading 27: Accounting Shenanigans on the Cash Flow Statement

答案和详解如下：

1.Which of the following statements about cash flow are correct or incorrect?

A)      Incorrect                                 Correct

B)      Correct                                    Correct

C)      Incorrect                                 Incorrect

D)      Correct                                    Incorrect

The correct answer was C)

Statement #1 is an incorrect statement. The cash effects of decreasing accounts payable turnover are limited. Suppliers will eventually stop extending credit because of delayed payments. Statement #2 is an incorrect statement. The tax benefits from employee stock options can result in a significant source of operating and financing cash flows. Tax benefits do not affect investing cash flows

2.Charger Corporation offers extended payment terms to its customers. In order to finance its accounts receivable, Charger is considering two alternatives. The first alternative is to borrow against the receivables. The second alternative is to securitize the receivables through a special purpose entity. Which alternative would result in lower operating cash flow and lower financing cash flow?

A)    Securitize                                   Securitize

B)    Borrow                                        Borrow

C)    Borrow                                       Securitize

D    Securitize                                   Borrow

The correct answer was C)

The cash received from borrowing would be reported as a financing inflow. The cash received from securitizing the receivables would be reported as an operating inflow. So, borrowing would result in lower operating cash flow and higher financing cash flow. Securitizing would result in lower financing cash flow and higher operating cash flow.

3.Earlier this year, Barracuda Company issued 5,000 employee stock options. Recently, 2,000 options were exercised at a price of $10 per share. To avoid dilution, Barracuda purchased 2,000 shares at an average price of $12 per share. Barracuda reported both transactions as financing activities in its cash flow statement. For analytical purposes, what adjustment is necessary to better reflect the substance of the stock repurchase?

A)                                        Decrease $4,000        No adjustment

B)                                        No adjustment     Increase $4,000

C)                                        Decrease $4,000        Increase $4,000

D)                                        No adjustment     No adjustment

The correct answer was C)

Barracuda reported a $4,000 net outflow from financing activities [2,000 options × ($12 average market price – $10 exercise price)]. However, since the options are a form of compensation, the $4,000 outflow should be reclassified as an operating activity for analytical purposes. This is accomplished by increasing financing cash flow $4,000 and decreasing operating cash flow $4,000.

4.Robin Page, CFA, is a portfolio manager for a medium-sized investment advisory firm that caters to high net worth individuals. Recent talk among industry insiders speculates that Best Made Industries, a large textile manufacturer, is in financial difficulty and has possibly been manipulating its financial statements over the past several years to suppress the bad news. Page is concerned because several of his clients currently have substantial positions in Best Made, and he wants to be sure that he can provide detailed analysis to them in order to decide whether to take action or not.

The research department of Page’s firm provides basic analysis of the financial statements of all relevant holdings, as well as economic forecasting. As with all holdings in the portfolios under his management, Page has regularly monitored the financial health of the company. Because of the recent rumors surrounding Best Made, Page decides his next course of action should be to thoroughly examine all footnotes to the financial statements as well as the accompanying management discussion and analysis section. He will search for any accounting irregularities as well as any nonoperating or nonrecurring transactions that should be removed for analytical purposes.

In the footnotes to the financial statements, Page reads that a portion of the company’s top managers’ compensation is options that are granted annually through a stock option plan. In the cash flow statement, Page notes that for the past several years, the company repurchased its shares as the options were exercised by its managers. At year end, 15,000 options with a strike price of $10.50 per share were exercised, and the price of the repurchased shares was $12.00 per share. Page is aware that the practice of repurchasing shares to compensate for the dilutive effects of stock option compensation can result in the company issuing financial statements that are in compliance with GAAP, but in reality may misrepresent the true economics of the transaction.

Page also will compare several years’ worth of Best Made’s financial statements to identify any warning signs that might signal accounting fraud or irregularities. He is aware of techniques used in the past by other large companies that were misleading to those outside the companies. Page will scrutinize the company’s financials, searching for any anomalies or unusual patterns that may indicate earnings manipulation by Best Made.

Page knows that publicly traded companies are under increasing pressures from analysts, creditors, and shareholders to consistently meet or exceed earnings expectations. Firms can exploit GAAP standards and issue financial statements that are simultaneously in technical compliance with reporting standards but misleading to those outside the company. Page is familiar with SAS No. 99, issued by the American Institute of Certified Public Accountants (AICPA), which addresses the topic of “Consideration of Fraud in a Financial Statement Audit.” Page plans on applying the three conditions outlined in the statement to the situation at Best Made to determine if indeed the company’s management has attempted to mislead the public.

There are many ways a company can manipulate their reported operating cash flows in order to deceive outside interested parties such as investors and creditors. Which of the following methods can a company utilize to increase its reported earnings? A firm can:

A)   delay payments on its accounts receivables.

B)   borrow cash against its accounts receivable.

C)   securitize its accounts receivable.

D)   capture a tax benefit when nonqualified stock options are exercised.

The correct answer was C)

A firm may be able to recognize a gain when securitizing its receivables. The gain would be equal to the difference between the book value and the fair value of the receivables at the time of securitization.

5.With regards to the repurchase of shares in the market related to the exercise of employee stock options, which of the following most accurately reflects the economics of the transaction?

A)    $22,500 outflow                              $0

B)     $0                                             $180,000 inflow

C)     $0                                             $22,500 outflow

D)   $157,500 outflow                           $180,000 inflow

The correct answer was A)

In accordance with GAAP, Best Made will report a $22,500 net outflow of cash from financing activities (15,000 options x ($12.00 repurchase price - $10.50 exercise price)). The options are part of the managers’ total compensation, so the cash outflow should be classified as an operating activity.