3. Many profitable businesses have been killed by cash flow problems, often in the start-up phase. A business has three types of cash flows: operating, investing, and financing. A key measure of cash flow health is free cash flow, the amount of operating cash flow generated in excess of the cash needed for important spending such as for capital expenditures. Managers must pay particular attention to the difference in timing between when cash is collected from customers from the sale of inventory and when cash must be paid to suppliers for the purchase of that inventory. A significant discrepancy between those numbers indicates a potential cash flow problem. Managers and owners of a business that is burning through cash spend much of their time worrying about cash flow survival and are therefore distracted from making the tactical and strategic decisions important to the long-run success of their business. (Cash Flow Problems Can Kill Profitable Companies Derrald Stice, Earl K. Stice, James D. Stice International Journal of Business Administration, Vol.8, No.6; 2017)

Required:-

a) Which methods of preparing cash flow statement are better? Why? Critically evaluate the problems with reported operating cash flow.

b) Discuss the procedure for using operation cash flow to detect creative accounting practices.