Analysts look for red flags in financial statements that may signal financial trouble.Which of the following is a red flag that suggests that a company may be in trouble?
A) a decline in days' sales in inventory
B) a decrease in days' sales in receivables from year to year
C) a reduction in the debt ratio
D) net cash provided by operating activities is consistently lower than net income

Question

Quizplus · Accepted Answer

Net cash provided by operating activities being consistently lower than net income may indicate that the company is having difficulty converting its earnings into cash, which could potentially signal financial trouble. A decline in days' sales in inventory or a reduction in the debt ratio might actually be positive indicators of a company's financial health, while a decrease in days' sales in receivables could suggest that the company is improving its collections process.

Analysts Look for Red Flags in Financial Statements That May