Free Cash flows

sh50

Active Member
#1
These links explain it all

http://www.equitymaster.com/detail.asp?date=5/13/2005&story=3

http://www.investopedia.com/articles/fundamental/03/091703.asp

What is to be debated is the formats which keep changing and are old wine in new bottles. Now balance sheets in India have also started reporting cashflow statements by which one can detect frauds associated with accrual accounting. The cash flow statements show cash from operations and cash used in investing and financing activities. Earlier it used to report only cash and bank transactions and later statement of changes in working capital. I recently came across a statement called statement of changes in owners equity which is just a variation of the funds flow statement with only balance sheet items. This may also be worth a look:-

http://www.investopedia.com/articles/04/033104.asp
 
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#3
sh50 said:
cashflow statements by which one can detect frauds associated with accrual accounting.
The impression of these words is that accrual accounting is a way of hiding frauds. The truth is accrual accounting is a way to reflect the worth of the organization in a way better than that represented by Cash Accounting.

Secondly, Cash Flow Statement can give an idea about cash-generation capability of the business. Thus, it's helpful for those who are interested in knowing the liquidity position of the organization like creditors or those shareholders who are interested in Dividends. However, it's not really a tool of detecting fraud. We must remember that both Enron & Worldcom used to provide Cash Flow Statement.

Best Regards,
--Ashish
 
#5
Frauds may or may not be detected using Free cash flows. Some companies inflate sales towards year end, by dumping their products on distributors and recording them as sales. However, there is no cash coming into the company. So when you compare the P&L and the cash flow statements, you can detect discrepancies. There are many others ways too to detect shenanigans in corporate results, though outright fraud may go by undetected.
 
#6
ivanboesky said:
Frauds may or may not be detected using Free cash flows. Some companies inflate sales towards year end, by dumping their products on distributors and recording them as sales. However, there is no cash coming into the company. So when you compare the P&L and the cash flow statements, you can detect discrepancies. There are many others ways too to detect shenanigans in corporate results, though outright fraud may go by undetected.
The gap between Cash Flow and Earnings has to be seen in light with that during the previous financial years as well as the average for the industry. Besides, year end window-dressing will certainly not generate any cash flow for the year but current year's Cash Flow will certainly include cash generated as a result of window dressing which took place at the end of the previous year.

A wide gap between cash flow and earnings may indicate that all is not well for the company but one can't jump to the conclusion only on the basis of this gap that the accounts have been manipulated.

Best Regards,
 
#7
cash flows can be a gud indicator.for example at this point of time there is lot of focus on construction companies.but going thru cash flows will indicate that realisations are not as rosy as they appear.the same thing happened with construction companies in 1992.but cash flow is no sure shot way to detect fraud.a carefully designed fraud cannot be detected.
 

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