Colgate-Palmolive Company

In: Business and Management

Submitted By dgreen6268
Words 461
Pages 2
In order to fully understand the true financial health of a company, the end user should carefully look over the statement of cash flows. Sure, investors and financial analyst can use the published numbers in the income statement and balance sheet to get a look at how a given company arrived a profit/loss, but it is the statement of cash flows which really helps a user to understand the quality of earnings. However, corporate management can embellish and overstate earnings simply by the affects resulting from the accounting process.
Colgate-Palmolive Company
An article from the CPA Journal comments on the affects of stretching out payments to vendors in order to embellish operating cash flow (Siegel, 2006). Siegel makes mention of the fact that investors and analyst may mistake the relaxed payment terms as a sign of continued growth since operating cash flow is inflated. In reality, vendors may not tolerate the slow payables for a long period before tightening payment terms. In the case of Colgate-Palmolive, a financial analyst might pay close attention to the accounts payable section under cash effects resulting from operating activities. As reported in 2007, the company reported $366,200,000, up from $149,000,000 in 2006. In 2008, payables dropped considerably, down to 125,000,000. Colgate simply explains the increase in 2007 due to costs increases in raw materials. I’d be interested in examining Colgate’s policies for payment on raw goods.
In lieu of creating the statement of cash flows under the direct method with an accompanying reconciliation of net income to operating cash flow (as recommended by SFAS 95) most companies prepare their statement of cash flows under the indirect method. CFO’s attribute the inclination to use the indirect method because of costs associated with preparing two financial schedules under the direct method, as opposed to one under…...

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