Explain the signs that indicate cash flow quality

Operating cash flow is harder to manipulate than accrual earnings but not immune. Good-quality indicators are operating cash flow that is positive, steady, driven by core operations and at least in line with net income over time. Signs of poor quality include operating cash flow boosted by selling receivables, stretching supplier payments or running down inventory; growth in operating cash flow driven by working capital while earnings stall; and capitalising spending so the outflow appears in investing rather than operating. Under IAS 7, interest and dividend classification choices also affect comparability. Free cash flow, operating cash flow minus capital expenditure, shows whether the business funds itself. The trap is praising cash flow that rose only because of a one-off timing change.