Chapter 5: The Cash Flow Statement

http://www.theaustralian.com.au/business/millions-added-to-abc-learning-accounts-court-told/story-e6frg8zx-1225852939625

Summary:
ABC Learning's former acting chief financial officer, John Gadsby has said in court that the company's internal accountants were instructed to prepare a cash flow statement for the rest of the fiscal year 2008. The original cash flow statement, referred as "first cut" at the courts, showed no sign of receiving an "compensation fees" paid to ABC Learning Centres from childcare operators and developers from June to December 2008. However, after chief executive and founder Eddy Groves reviewed it, a "second cut" of the statement was presented; showing $44.79 million in fees received over that six-month period.

Connection:
Cash flow statement, according to the text book, is to be prepared to measure the company's performance on a cash basis. It cannot replace the income statement as it summarizes the cash flows. Groves has altered the numbers on the cash flow statement resulting in the betterment of the company's "performance". Cash flow statement is used for investors and users to ideally measure the company's performance over a period of time. This can help them better predict the investments made to the company and whether or not the investment shall continue. Groves, by altering the numbers on the cash flow statement, will mislead the users into thinking that the company is doing very well and will continue to invest; result of a fraud.

Conclusion:
As a company, I believe it is crucial to provide the correct and valid information in the books as this is part of ethics and also the ties in with the name of the company. As an investor, it is absolutely important to have the right information in front of me before I make my investment decisions. A fraud like this may cost me millions in loss. Referring back to the book, I believe it is important to have a separate statement to measure the company's performance on a cash basis as the cash flow statement shows the financing, operating and investing activities within the company. Hence, help users better predict the potential of the company.