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does this, it artificially boosts the current-period CFO by deferring ordinary cash outflows to a future period.
Judgment should be applied when evaluating changes to working capital accounts, because there can be good or bad intentions behind cash flow created by lower levels of working capital. Companies with good intentions can work to minimize their working capital--they can try to collect receivables quickly, stretch out payables and minimize their inventory. These good intentions show up as incremental and therefore sustainable improvements to working capital.
Companies with bad intentions attempt to temporarily dress-up cash flow right before the end of the reporting period. Such changes to working capital accounts are temporary because they will be reversed in the subsequent fiscal year. These include temporarily withholding vendor bills (which causes a temporary increase in accounts payable and CFO), cutting deals to collect receivables before year-end (causing a temporary decrease in receivables and increase in CFO), or drawing down inventory before the year-end (which causes a temporary decrease in inventory and increase in CFO). In the case of receivables, some companies sell their receivables to a third party in a factoring transaction--which has the effect of temporarily boosting CFO.
3. Capitalized expenditures that should be expensed (outflows in CFI that should be manually re-classified to CFO) (Refer to #3 on the Verizon CFO statement.)
Under cash flow from investing (CFI), you can see that Verizon invested almost $11.9 billion in cash. This cash outflow was classified under CFI rather than CFO because the money was spent to acquire long-term assets rather than pay for inventory or current operating expenses. However, on occasion, this is a judgment call. WorldCom notoriously exploited this discretion by reclassifying current expenses into investments, and, in a single stroke, artificially boosting both CFO and earnings.
Verizon chose to include 'capitalized software' in capital expenditures. This refers to roughly $1 billion in cash spent (based on footnotes) to develop internal software systems. Companies can choose to classify software developed for internal use as an expense (reducing CFO) or an investment (reducing CFI). Microsoft, for example, responsibly classifies all such development costs as expenses rather than "capitalizing" them into CFI-- which improves the quality of its reported CFO. In Verizon's case, it's advisable to reclassify the cash outflow into CFO, reducing it by $1 billion.
The main idea here is that, if you are going to rely solely on CFO, you should check CFI for cash outflows that ought to be reclassified to CFO.
4. One-time (nonrecurring) gains due to dividends received or trading gains
CFO technically includes two cash flow items that analysts often re-classify into cash flow from financing (CFF): (1) dividends received from investments and (2) gains/losses from trading securities (investments that are bought and
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