5 Red Flags to look for in Financial Statements

Posted by admin Filed in Accounting on Monday, July 20th 2009

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Hello There! Here are some tips for all you accountants out there who are thriving on this kind of information. This is for you. This particular article focuses on some red flags accountants need to cover before proceeding with an analysis on financial statements. tax consultants, tax agents, and home based businesses also need to cover this information is at might help you. If you or your business needs in figureing this complexities out consult your accountant or tax consultant for more information. Okay, here is the list the accountants are waiting for. Again this is for financial statement purposes only.

Movement of sales, inventory, and receivables

Sales, receivables, and inventory move together. Increased sales may lead to higher receivable and require more inventory to meet demand. If there are strange movements among sales, inventory, and receivables then there is trouble.

Earnings Problems

Often times net income decreases significantly. If this happens for several years in a row the company is losing money and most will not survive consecutive loss years.

Decreased Cash Flow

Cash flow always validates net income. If cash flow from operations expense is lower than net income then the company is in big trouble. Also, if the sales of plant assets are a major source of cash, this may cause cash shortage.

Too much Debt

If the company’s debt ratio is way too high it may be unable to pay of its debts.

Buildup of Inventories

If the inventory turnover is low then the company may be unable to sell goods ; or it may be overstating its inventory. Either case will require thorough investigation and audit.

Inability to collect recievables

If Days sales receivables gwoing faster than for competitors, this may mean that there is a cash shortage.

I am a student at Portland State University in my junior year heading towards a degree in marketing and accounting. I specialize in finance, marketing, accounting, and entrepreneurship.

Article Source:http://www.articlesbase.com/accounting-articles/5-red-flags-to-look-for-in-financial-statements-1051932.html

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