Financial Shenanigans: Cash Flow & Key Metrics Shenanigans (Part 3)

In the previous post I mentioned the brief summary of Earnings Manipulation shenanigans.
Below is the summary of some methods used to manipulate cash flow & key metrics in financial statements as identified by Howard Schilit in his book Financial Shenanigans.
CASH FLOW SHENANIGANS:
1. Shifting financing cash flow to operating section
- Recording bogus cash flow from operations (CFFO) from a normal bank borrowing
- Boosting CFFO by selling receivables before the collection date
2. Shifting normal operating cash outflow to the investing section
- Inflating CFFO with boomerang transactions
- Improperly capitalizing normal operating costs
- Recording the purchase of inventory as an investing outflow
3. Inflating operating cash flow using acquisitions or disposals
- Inheriting operating inflows in a normal business acquisition
- Acquiring contracts or customers rather than developing them internally
- Boosting CFFO by creatively structuring the sale of a business
4. Boosting operating cash flow using unsustainable activities
- Boosting CFFO by paying vendors more slowly
- Boosting CFFO by collecting from customers more quickly
- Boosting CFFO by purchasing less inventory
- Boosting CFFO with one-time benefits
KEY METRICS SHENANIGANS:
1. Showcasing misleading metrics that overstate performance
- Highlighting a misleading metric as a surrogate for revenue
- Highlighting a misleading metric as a surrogate for earnings
- Highlighting a misleading metric as a surrogate for cash flow
2. Distorting balance sheet metrics to avoid deterioration
- Distorting accounts receivable metrics to hide revenue problems
- Distorting inventory metrics to hide profitability problems
- Distorting financial asset metrics to hide impairment problems
- Distorting debt metrics to hide liquidity problems
Few red flags associated with cash flow & key metrics manipulations:
- Disclosures about selling receivables with recourse
- Changes in the wording of key disclosure items in the financial reports
- Providing less disclosure than in the prior period
- Unexpected increase in capital expenditures
- Investing outflows that sound like a normal cost of business
- Declining free cash flow while CFFO appears to be strong
- New categories appearing on the statement of cash flows
- Selling a business, but keeping the related receivables
- Accounts payable increasing faster than cost of goods sold
- Changing the definition of a key metric
- Increases in receivables other than accounts receivable
- A huge decline in debtor turnover ratio following several quarters of growing receivables
- Stopping the reporting of certain key metrics