Lesson 6 of 7 · 12 min
Choices that affect operating cash flow
Investors treat operating cash flow as a reality check on earnings, but it too can be flattered, by timing payments, by moving items between sections and by the classification options in IAS 7.
In short
- Many investors see cash flow from operations (CFO) as harder to manipulate than earnings. It is harder, not impossible.
- Stretching payables: delaying payments to suppliers past period-end raises CFO for that period without improving the business.
- Misclassification: moving operating outflows into investing or financing, or disguising borrowing as operating inflows, inflates CFO.
- Capitalised interest: how interest payments and non-cash discount amortisation are split between operating and investing creates a range of possible CFO figures.
- IAS 7 lets non-financial companies classify interest paid as operating or financing, interest and dividends received as operating or investing, and dividends paid as financing or operating.
- Check CFO against net income over time; a ratio persistently below 1 or falling is a warning.
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