Chapter 3 explains the perils of using Discounted Cash Flow (DCF) valuation: The free cash flow measure on which it is based treats investments that add value as a “bad.” And it does not capture transactions that affect value until cash is involved. Pension payments are an example: DCF analysis brings the (negative) value for pensions into the valuation only when cash is paid out for pensions when employees retire. That can be a long time in the future, leaving the investor to predict the long term, a daunting task. Accrual accounting recognizes the periodic cost of pensions in advance, along with the liability to pay out pension benefits in the distant future.
There is one expense which is never recognized in DCF analysis: stock compensation expense. That involves an issue of shares to employees, no cash. Thus, DCF valuation will be in error, even if the investor forecasts to the very long run. A firm can game the analyst using DCF: convert cash compensation to share compensation, adding to cash but not to value.