Operating Cash Flow

In an earlier post I discussed the SEC's decision to force companies to change how they classify certian cash flow activites. Today's WSJ has an article detailing how that change is starting to affect certain companies:

Major companies like Caterpillar Inc., General Motors Corp. and Ford Motor Co. have recently slashed their previously reported numbers for operating cash flow in response to the Securities and Exchange Commission's stance that they have been incorrectly categorizing their vendor financing for cash-flow purposes. While expected, now that annual reports are rolling off the presses, it is becoming clearer how much some companies are affected.

The change really affected Caterpillar who saw its cash flows from operations decrease by over $14 Billion dollars in 2002-2003. Recall that this change results from how companies treat receivables that are creatted when the company provides loans or other financial assistance to its dealers to help them buy products out of the company's inventory. In the past companies treated these receivables as financing activities, but now the SEC requires that companies treat these receivables as operating activities.


Here is Caterpillar's recent Cash Flow Statement with the relevant accounts in bold:





Its important to note that Caterpillar gets hit harder than most companies because as the article states:

Caterpillar's operating cash flow is suffering harshly in part because its finance receivables go into an off-balance-sheet entity, and Caterpillar receives "retained interests" in the receivables, not cash, in exchange for a portion of them. In its annual report, Caterpillar said accounting rules dictate that its collections on those retained interests must be treated as an investing transaction, rather than an operating transaction, and that results in a "significant" shift in cash flow away from operating and to investing.