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FNT1_Chap14 (12) - Ii Horngren Mozilla Firefox file Edit...

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Unformatted text preview: Ii Horngren - Mozilla Firefox file Edit flew History fioekmarks [eels flelp lil'nf‘ e x m e la http1#wpscmspearsencmg.comlwpslmedialobjectsl‘sT16I6877765lhha08_f|ash_main.html?chapter=nuil&page=745&anchery=nul|&pstart=nuil&fin ' .3 v: 779923 '.'Vt}'[email protected] gamma-mas wimp-65E 1E unswwélilétmmvemetwnnn Q I [j Horngren Hnrngren Accounting, 8th edition Cu nte nts } Red Flags in Financial Statement Analysis Analysts look for red flags that may signal financial trouble. Recent accounting scandals highlight the importance of these red flags. The following conditions may reveal that the company is too risky. Movement of Sales, Invenlory, and Receivables. Sales, receivables, and inventory generally move together. Increased sales lead to higher receivahies and require more inventory to meet demand. Unexpected or inconsistent movements among sales, inventory, and receivables make the financial statements look suspect. Earnings Problems. Has net income decreased significantly for several years in a, row? Has income turned into a loss? Most companies cannot survive consecutive losses year after year. Decreased Cash Flow. Cash flow valédates net income. Is cash flow from opera- tions consistently lower than net income? If so, the company is in trouble. Are the sales of plant assets a major source of cash? if so1 the company may face a cash shortage. Too Much Debt. How docs the company’s debt ratio compare to that of major corn— petitors? Ifthe debt ratio is too high. the company may be unable to pay its debts. Inability to Collect Receivables. Are days’ sales in receivables growing Faster than for competitors? A cash shortage may be learning. Buildup of Inventories. Is inventory turnover too slow? lf so, the company may be unable to sell goods, or it may be overstating inventory. Do any of these red flags apply to eid'ter Smart Touch Learning or Greg’s Groovy Tunes from [he analysis we did in the chapter? No, the financial statements of both companies depict strong and growing companies. Will both Smart Touch Learning and Greg’s Gromry Tunes continue to grow? 'licne wrli tell. The Decision Guidelines summarize the most widely used ratios. @an oazwi ...
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