Although cash flows are often assumed to be more factual than earnings, the actual classification of cash flows as operating, investing or financing cash flows has some degree of discretion, either because of a choice in the accounting standards or because of the way that transactions are structured. This is important as analysts often focus their attentions on operating cash flows, and therefore management are incentivized to inflate operating cash flows at the expense of investing or financing cash flows. Now, there are three main areas where management tend to manipulate the classification of cash flows. The first of these is in relation to cost capitalization. If companies capitalize costs as part of their property, plant, and equipment or intangibles, this means that the cash flows are reported as investing cash flows rather than as operating cash flows. So how can companies achieve this? Well, companies sometimes have the choice as to whether to capitalize costs, for example, interest costs associated with construction of assets for other costs such as software development costs and some R&D costs. Under IFRS, it is not so much a choice, but more a gray area. In accounting, these costs should be capitalized as intangible assets where certain criteria are met, but these criteria in themselves are quite easy to manipulate. The issue is that the main cost for R&D and software development are just staff costs, so it's extremely tempting for management to argue that an increased number of staff have been involved in an R&D project or software development project so that their salaries can be capitalized rather than expensed. How can we spot this? Well, one of the main signals for this would be elevated levels of CapEx, and that's intangible CapEx, as well as tangible CapEx relative to sales and historic depreciation amortization. This can also manifest itself in the company having abnormally high margins when compared with peers because of lower levels of staff costs being included in earnings. The next area is investment income. In particular, joint venture and associate dividends and interest income under IFRS companies have the choice as to whether to classify this investment income as operating or investing cash flows. Most analysts would view these as an investing cash flow, but some companies do choose to classify them as operating cash flows, and that's easy to see why as it gives an additional boost to the company's operating cash flows. Now, this accounting choice is relatively easy to spot as it will be evident in the cashflow statement. The final category is the use of supply chain finance. Supply chain finance refers to factoring or reverse factoring by companies, and it is effectively a source of off balance sheet finance. This means that the cash inflow generated by supply chain finance is shown as an Operating cash flow rather than a financing cash flow. So again, it provides an additional boost to operating cash flows. Now this can be extremely difficult to spot as this form of financing is often structured in such a way that it doesn't require explicit disclosure in the financial statements.