Friday, May 15, 2009

Accounting Red Flags - Anomalies to watch out

Few points:

1) Periodic Earnings rate increase should be commensurate with cash flow increase - If earnings increase but not cash flow, there is a possibility that company may be selling assets/investments to cover losses.

2) Analyst can read the audit report to see if the auditor has a qualified, adverse of disclaimer of opinion.

3) Inventory turnover ratio keeps decreasing though sales is consistent. - Management could be piling up inventories on credit to boost the cash flow ( tax advantage)

4) Frequent changes in accounting policies.( like change from FIFO to LIFO without concrete reasoning). This should be viewed in terms of timing.

Good link:

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