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 match expenses and revenues more closely, 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 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 (i.e., recording them as assets to be amortized over future periods) match expenses and revenues 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 current financial statements provide measures of each.
c. Explain why unexpected bankruptcies would draw attention to cash flow analysis. Your response should include a discussion of why the statements of earnings and financial position might not adequately alert users to impending bankruptcies.