ARTICLE EXTRACT POINT A: Company X may have inflated profits by up to 50 per cent over the last two years through the use of acquisition accounting to write-down inventories and establish other liabilities.

POINT B: Weak operating cash flow with a widening divergence from cash profits raises additional concerns that profits are being manipulated. Tell-tale signs include rising receivables and inventories which suggest possible channel-stuffing and deferral of overheads.

POINT C: The winding down of benefits from acquisition accounting may have left a hole in earnings; if we are correct, there is 35 per cent downside to the share price. QUESTION: Explain how Company X may have used acquisition accounting to write down inventories and establish other liabilities to inflate profits as in Point A.