Financial Shenanigans

3 ideas

1. Earnings shenanigans: shift income across periods

   Earnings manipulation comes down to a few moves: record revenue too early or invent it, inflate income with one-time gains, shift current expenses to later periods, or hide expenses and liabilities. A second family does the reverse. It moves current income into the future, for example by stashing revenue in reserves, or pulls future expenses into the present through overstated one-time charges. Both families move profit from the period where it belongs to the period where management wants it.

2. Operating cash flow diverging from net income

   Accrual earnings are easy to shape with estimates and judgment, so a persistent gap where net income rises while cash flow from operations lags is a primary warning sign. Rising receivables and inventory that grow faster than revenue often explain the gap.

3. Cash flow shenanigans via misclassification

   Companies can inflate operating cash flow without changing total cash by moving items between sections of the cash flow statement. They put financing inflows, such as selling receivables or borrowing through supplier-finance arrangements, into operating cash flow. They push normal operating outflows into investing, such as capitalizing costs or treating acquisitions as a way to buy operating cash flow. Because many investors treat operating cash flow as the manipulation-resistant check on earnings, this trick specifically defeats the most common forensic test.

Save and mark ideas in the app