In Forbes, Loan Officer, Han Blackford, commented that cash flow analysis has risen in impor¬ tance due to a “trend over the past twenty years toward capitalizing and deferring more and more expenses. Although the practice may match revenues and expenses more closely, a laud¬ able 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.” The article further stated that “During [a recent recession] a wave of bankruptcies drew attention to the need for better warning signals of the sort cash flow analysis could provide.”* *Jinny St. Goar, “Where’s 4th Quarter Profits Reflecting Unusual Accounting Method?” Forbes, April 8, 1985, p. 120. 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 earning power and solvency, why both are essential for a successful business, and how present-day financial accounting statements provide mea¬ sures of each.

c. Explain why a wave of bankruptcies would draw attention to cash flow analysis.