Loan officer Han Blackford once commented that cash flow analysis has risen in importance due to a “trend over the past twenty yeas toward capitalizing and deferring more and more expenses. Although the practice may match revenues and expenses more closely, a laudable intent, it has also made it harder to find the available cash in a company-and easier for lenders to wind up with a loss.” He further noted that recessions draw attention to the need for better warning signals of the sort cash flow analysis could provide.
Required
(a) Why would the process of capitalizing match revenues and expenses more closely, yet make it harder to find the cash available in a company?
(b) Discuss the difference between earnings power and solvency, why both are essential for a successful business, and how present-day financial accounting statements provide measures of each.
(c) Explain why a wave of bankruptcies would draw attention to cash flow analysis.