Tricks in Accounting

Summaries

1)      Increase A/P using credits: this can increase the Days-in-payables (= 365 x A/P / COGS)

2)      Financing A/P:

a.      Arrangement with financial institute which pays the suppliers

b.      A/P reduced (operating outflow) (at a time inflow is high to cover this outflow)

c.      Debt: financial in flow

d.      Total cash flow unchanged

e.      When repay: net outflow is delayed

3)      Securitize A/R

a.      If borrow against, CFF

b.      If securitized, CFO

c.      Change of the security market value can affect the income statement also

d.      This accelerates the operating cash inflow

4)      Stock options

a.      Firms have to report compensation for stock options once granted. But it is not tax deductible immediately.

b.      When the employee exercise the options, the firm gets tax benefit for the gain of the employee X firm’s tax rate.

c.      The part related to compensation is operating cash flow and the excess part is financial cash flow

d.      Exercise:

                                                               i.      Employee pays exercise price (CFF)

                                                             ii.      Issue new shares and repurchase (CFF)

                                                            iii.      Tax Benefit for compensation (CFO)