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First

Many ways exist where balance sheet can trap cash from legitimate sales. The most

common is the delayed payment that leads to increased inventory levels since the product is not

being returned or getting sold. The payment occurs after the close of the end quarter or fiscal

year, thus operating cash flow will be less than the accrued earnings in the period. Operating

cash flow increases when day’s sales in payables increase. Another technique involves third-

party financial institution to settle a debt with the supplier and pays back later with the bank in

subsequent periods. The company alters the timing of its operating cash flows. No cash will be

expended concerning money being paid to vendors. The amount paid by the financial institution

will be reclassified from accounts payable to short-term loans. This leads to an increase in

commercial activity and subsequent decrease in the operating businesses (Bal Gnyana 254).

Stretching out may not work in the long term because it will result in duplicate payments.

Invoice not paid on time will prompt vendors to send another invoice to the company. Even with

the existence of the quality system, few invoices will slip through and get paid twice. The paid

receipt rarely tracks the duplicate payment. Furthermore, the delayed payments hurt the

relationship with vendors. Most vendors and suppliers will be affected financially as they will

experience some form of cash flow issue. Delayed payments cause complication since staff will

be tasked to manage a more complicated process. Money- collection calls will increase which

cannot be enjoyed by the staff members (Mahama 17).

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Prompt payment is a core ethical issue. A large company is taking advantage of the small

company since they have more power. Delayed payments have a catastrophic effect on the SME

which is hurting the economic recovery of the nation in the process. It’s a form of corporate

bullying and unethical business practice since small companies have a little cushion.

Second

The company will select those receivables with long term and higher credit quality and

transfer them to the financial institution with bankruptcy remote. Since creditors cannot attach

assets of the bankruptcy institution, the GAAP assumes that the receivables have been sold and

the proceeds posted on the operating section of the cash flow statement. This will help boost the

operating cash flow reported by the company. However further increase in reported earnings

should be considered unsustainable since there is a limit to how much a company can securitise.

When long term accounts receivables are securitised, a company will report again since

the book value has excluded all the future interest income that is yet to be earned, but the entity

purchasing will have to pay for all the future interest. The gain has been offset by various

management assumption such as receivables default rate expected and expected discount rate.

The book value should be less than the number of debtors thus generating again. Since GAAP

does not describe the exact place to record the gains on the income statement, the company can

choose to offset selling and administrative expenses, or others may want to report a profit on the

sale of the receivables. Since the receivables amount is higher than the book value, a gain is

generated which serves as an indication of the cost of securitization (Wang and Zigan 28).
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Third

Consistent negative cash flow from operating activities is an indication that the company

is losing money. Money can be lost when salaries and costs are higher than the revenue

generated by the company. More substantial expenses can cause a company to experience

negative cash flows. It may indicate that the company has enormous operating expenses that are

yet to be converted into cash profits. These include inventory which should be sold on time to

make a profit. This will prevent it from being insolvent.

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Works cited

Wang, Zigan. Essays on Chinese Corporate Issuers and Financial Markets. Columbia

University, 2015.

Mahama, Muntari. "Detecting corporate fraud and financial distress using the Atman and

Beneish models." International Journal of Economics, Commerce and Management 3.1

(2015): 1-18.

Bal, Gnyana, N. Rao, and Satyajeet Raja. "Evidences of Financial Shenanigans from Past and

Techniques to Predict Earnings Management and Solvency Position: A Case Study of

IOCL." (2013).