Net Income Is Fiction, Cash Flow Is Fact

With all of the regulation regarding regarding financial reporting, including Sarbox, you might conclude that the earnings reported by a company would be precise and correct. However, recent research indicates that 20 percent of companies manage earnings. Managing earnings in this context means that companies may under-report earnings in one quarter to offset potential down earnings in future quarters. In a recent interview, Dr. John Graham discusses the results of his research and suggests that a more important measure of corporate performance is cash flows. While earnings can be manipulated through accounting choices, cash flow is much more difficult to manipulate.