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2025 R36 Module 36.3

The document outlines various accounting warning signs that may indicate potential manipulation of financial statements, including unusual revenue growth, changes in revenue recognition, and declining inventory turnover ratios. It emphasizes the importance of further analysis when multiple warning signs are present and suggests avoiding investments without adequate explanations. Additional warning signs include unusual depreciation methods and a lack of transparency in financial disclosures.

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Ĺuke Shah
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3 views3 pages

2025 R36 Module 36.3

The document outlines various accounting warning signs that may indicate potential manipulation of financial statements, including unusual revenue growth, changes in revenue recognition, and declining inventory turnover ratios. It emphasizes the importance of further analysis when multiple warning signs are present and suggests avoiding investments without adequate explanations. Additional warning signs include unusual depreciation methods and a lack of transparency in financial disclosures.

Uploaded by

Ĺuke Shah
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Financial Statement Analysis

Warning Signs

Warning Signs

Accounting Warning Signs


 Warning signs indicate that more analysis is required;
determine if there is a business purpose, or if financial
statements are being manipulated

 Multiple warning signs without an adequate explanation:


consider avoiding the investment

© Kaplan, Inc.
1

1
Warning Signs

Accounting Warning Signs


Revenue recognition warning signs
 Revenue growth out of line with peers
 Change in revenue recognition method
 Bill-and-hold transactions
 Changes in rebate estimates
 Receivables turnover, total asset turnover decreasing
over time
 Non-operating or one-time items included in revenue

© Kaplan, Inc.
2

Warning Signs

Accounting Warning Signs


Inventory warning signs
 Inventory turnover ratio declining over time
 Decrease in inventory under LIFO: results in
unsustainably low COGS

© Kaplan, Inc.
3

2
Warning Signs

Accounting Warning Signs


Capitalization and cash flow warning signs
 Capitalization of costs that industry peers do not capitalize
 Ratio of CFO to net income is consistently less than one
or declining over time

© Kaplan, Inc.
4

Warning Signs

Accounting Warning Signs


Other warning signs
 Depreciation methods,  Recurring “nonrecurring
useful lives, salvage values expenses”
out of line with peers  Lack of transparency and
 Fourth-quarter earnings disclosure
surprises  Emphasis on non-GAAP
 Significant related-party earnings measures
transactions  Numerous acquisitions

© Kaplan, Inc.
5

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