Loan officer Han Blackford once commented that cash flow analysis has risen in importance due to a “trend over the past 20 years toward capitalizing costs and deferring more and more expenses. Although the practice may be better in terms of reporting expenses in the same period as the revenues they generated, 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, and the bankruptcies that often result, draw attention to the need for better warning signals of the sort that cash flow analysis could provide.
Required:
a. Why would the process of capitalizing costs (recording them as assets to be depreciated over future periods) be better in terms of reporting expenses in the same period as the revenues they generated, yet make it harder to find the cash available in a company?
b. Explain why unexpected bankruptcies would draw attention to cash flow analysis. Your response should include a discussion of why the statements of income and financial position might not adequately alert users to impending bankruptcies.