Question

Give some examples of how a firm can depress the cash flows that it reports in order to report higher cash flows later. Q13.30 Give some examples of how a firm c

Answer 1

1: A firm can claim lower depreciation initially so as to get lower cash flows. Lower depreciation will give lower tax benefit and this will keep cash flows lower. Later the firm can claim higher depreciation so as to increase tax savings and cash flows.

2: Also it can sell on credit excessively to reduce cash flowfrom debtors. This can be recovered later to inflate the cash flows.

3: Paying off debts only to take them again later will also give the same result.