Following generally accepted accounting principles, companies may be overstating their operating cash flow and understating their debt—or at least making it tougher for investors to draw their own conclusions, according to recent research by the Georgia Tech Financial Analysis Lab.
Companies have long bundled accounts receivable and sold them to investors in securitized transactions, turning receivables into immediate cash. Financial Accounting Standard No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and its related interpretations provide a roadmap for how that can be done to assure the incoming cash that results from such transactions can be classified not as debt but as operating cash, says Charles Mulford, director of the Georgia Tech research operation.
