![]() The flip side of that coin is CFO’s primary downside: You don’t get an accurate picture of ongoing profitability. It’s harder to manipulate CFO than accounting profits (although not impossible, since companies still have some leeway in whether they classify certain items as investing, financing or operating activities, thereby opening the door for manipulating CFO). The benefit of CFO is that it is objective. ![]() Two identical companies can have very different income statements if the two companies make different (often arbitrary) deprecation assumptions, revenue recognition and other assumptions. Since accrual accounting depends on management’s judgment and estimates, the income statement is very sensitive to earnings manipulation and shenanigans. However, we should not rely solely on accrual-based accounting, either, and must always have a handle on cash flows. While its CFO may be very low as it ramps up working capital investments, its operating profits show a much more accurate picture of profitability (since the accrual method used for calculating net income matches the timing of revenues with costs). Imagine if you only looked at cash from operations for Boeing after it secured a major contract with an airliner. We wrote an article about this here, but to summarize: Accounting profits are an important complement to cash flows. ![]() CFO is an extremely important metric, so much so that you might ask, “What’s the point of even looking at accounting profits (like Net Income or EBIT, or to some extent, EBITDA) in the first place?” ![]()
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