This issue has two parts. If you have experienced a ride on the tube (the subway system) in London you were probably surprised by the kind reminder when the train arrives at the station. As the train stops you are reminded to "Mind the Gap," the gap being the distance between the train and the station platform. A gentle reminder issued by polite voice than warns you to be careful and watch your step when leaving the train. An article in CFO Magazine issues a similar warning to Mind the Gap (see http://www.cfo.com/article.cfm/2989286/c_3046523?f=magazine_coverstory) between earnings and cash flows. The article warns of a potential disconnect between earnings and cash flow that is important when analyzing a company's performance. After reading the article, answer the following questions: 1. Do companies have some flexibility in recognizing gains from sales of assets? Give an example of how that could affect growth. 2. How could outsourcing impact growth in cash flow? Give an example of how outsourcing affected growth in cash flow. ---------------------------------------- Instructor Notes: Part 1: The article points out several examples of flexibility in recognizing gains or losses on sales used by companies that allow them to manage reported income and operational cash flow growth. Companies can, within limits, report some items that may be nonrecurring as operational items rather than extraordinary items. For example, Texas Instruments used a gain on a sale to reduce its sales and general administration expense. This boosted operating income. Part 2: Companies that do all or most of their own manufacturing require higher levels of investments in assets. If you compare their results to companies that outsource manufacturing, firms that do their own manufacturing chew up more cash flows. The level of cash flows will be higher for an outsourcing firm. While level of cash flows will be higher for the outsourcing firm, potential issues of risk such as quality control could be different.