Saturday, 20 July 2002

Cash flow

MISLEADING. There seems to be some degree of confusion, even within the financially literate sector, as to just what happened at Worldcom. What is certain is that over the last couple of years, a reclassification of a substantial part of its normal repairs and maintenance expenses into deferred expenditure (capitalized assets) boosted its earnings results, thereby misleading investors and outside parties into thinking the company was more profitable than it really was.

However, certain reports also claim that Worldcom boosted its “cash flow” position by the same tactics that it used to obscure its earnings results. Could this be the case?

Imagine the case of a small business. Our neighborhood convenience store spends P10,000 in one month—P5,000 to purchase a dough mixer, and P5,000 to pay for its telephone and electricity bills used for the period. The accountant preparing our store’s books would record P5,000 of utilities as an expense for that month, and the other P5,000 as an asset to be amortized over time. Clearly the store had enjoyed the benefit of the utilities already, while it still had to fully benefit from buying the dough mixer, hence, the difference in treatment.

The matching concept (of costs and revenues) that we know from our basic accounting days makes the distinction between both unequivocally clear, and there should be no argument about what belongs to which period. There are instances, however, where the difference may not be so clear.

Let us say that instead of buying a dough mixer, the P5,000 was used to pay for painting the storefront? Is P5,000 then still an expenditure for future periods, or does it become an expense for the month? The answer is not so straightforward. If the painting job is a recurring item, that is, it is done periodically because of normal wear and tear of the store’s fa├žade, the cost should be expensed as incurred. However, if the painting is part of the establishment of the building, or it is deemed to be a significant improvement on the building that would prolong its useful life, then the cost may possibly be capitalized.

MAKING A CHOICE. Worldcom came face-to-face with such a choice regarding its normal repairs and maintenance expenses, and apparently, instead of declaring them as costs when they were made, the company chose to capitalize them as assets, so they would hit the profit and loss account in the future. Though not too terribly clever or sophisticated, it seemed to fool many people up until recently.

But think about it for a second. Whether our store spent P5,000 on a dough mixer or painting the storefront has no impact on how much remains in our owner’s bank account. At the end of the day, the same amount of money is not in his account.

Say our owner had P100,000 last month. This month, he spent P10,000 on the business, and so has P90,000 left. His cash flow for the month must be P10,000, which is the difference between the cash he had in the beginning of the period, and the cash he still had at the end of it. Does it matter that P5,000 was spent to buy a dough mixer or to paint the storefront? And assuming he did the latter, does it make a difference if he classified the painting cost as an asset or an expense for the period? Of course not! Either way, his cash flow is still P10,000.

Coming back to Worldcom, the only thing the company did was to call a few billion dollars of repairs and maintenance costs assets instead of expenses, a situation very similar to that of our storeowner. Why then do many say that Worldcom enhanced its cash flow through accounting manipulation? (More next week).

Published in the Sun Star Daily, Saturday, July 20, 2002 (http://www.sunstar.com.ph/static/ceb/2002/07/20/bus/batuhan.cash.flow.html).

Saturday, 6 July 2002

60 years ago today

WARTIME. Sixty years ago today, a baby was born somewhere in the mountains between Danao and Carmen. It was wartime then, so the newborn baby’s cries had to be hushed down by her parents, lest the wailing give their location away to the much-feared Kempeitai. Not that they had probably anything to fear from the Japanese invaders in particular, but like much of the shell-shocked populace then, they were not about to take any chances.

Thus it was that this baby was to spend much of her early years until Liberation Day, without making too much fuss, and scarcely attracting a great deal of attention to herself. In fact, well into her growing years, through her adulthood, and to this day, this baby continues to conduct herself with quiet dignity and unobtrusive demeanor, going about her life, generously helping those she can, without calling undue notice to herself in the process.

This baby is my mother, Carmencita Banzon Batuhan, who turns 60 today.

Mom, who has spent most of her life nurturing children during their early formative period, also retires this year from a long career as a public school teacher. Over the years, she has seen her pupils go on to become distinguished professionals, career persons, entrepreneurs and responsible members of our community. Obviously inspired by her unrelenting determination to see them through the conclusion of their education, many of her students—most of whom come from the less fortunate sectors of our community— rewarded her with the greatest gift any teacher could ever wish for—success in their own chosen endeavors.

EDUCATOR. Growing up, I was always amazed at the amount of infectious energy Mom put into her work. Thankless enough as jobs go, hers was made even more difficult by the circumstances in which she taught. Banawa Elementary School, where she spent a good number of years as educator, counts as its pupils children coming mostly from lower middle-class and lower class families. These kids face greater challenges in completing their education than most of us can relate to—everything from lack of money to buy books, to lack of money for snacks at recess time.

Mom would help them out whenever she could. She would loan money to her pupils so they could buy textbooks, purchase clothing and pay for their other educational expenses. To those who were really determined, she would even help to pay for their expenses beyond elementary school. When I was a young boy, it was not unusual for me to see my old shirt or pair of shorts being worn by one of

Mom’s pupils, sometimes to my surprise as I had not quite “retired” a number of them just yet. Mom’s faith in the miracle of education to empower, emancipate and enable all who possessed the determination and drive to succeed did not only inspire those she taught at school, but also her children, who in their own ways have managed to make the most of their individual God-given capacities and abilities.

Totol, Ann, Aleli and I are what we are today, because of the inspiration quietly imparted to us by one humble schoolteacher, who was born 60 years ago in the mountains between Danao and Carmen.

Happy Birthday, Mom, and thank you for everything!

(I will write about more serious issues, starting with Worldcom, next week.)

Published in the Sun Star Daily, Saturday, July 06, 2002 (http://www.sunstar.com.ph/static/ceb/2002/07/06/bus/batuhan.60.years.ago.today.html).