There are many people today who believe that cash flow is a better indicator of a company's future success than profit. This notion gained popularity after many reports of corporate financial scandals where management was apparently able to manipulate prepayments and accruals to influence profit.

Instructions

Write a memo discussing whether you believe cash flow is a more reliable performance measure than profit. Include in your memo the answers to the following questions:

 What is the difference between accrual-based profit and cash?

 Do you believe that it is possible for management to manipulate profit when using accrual accounting? If so, identify at least one way that management might be able to increase profit by manipulating prepayments or accruals.

 Do you believe that it is possible for management to manipulate profit when using cash basis accounting? If so, identify at least one way that management might be able to increase cash flow.