Analysts Look for Red Flags in Financial Statements That May

question 44

Multiple Choice

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

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Definitions:

Fixed Amount

A specified sum that does not vary or change under specified conditions.

Principal

A main party to a transaction, such as the owner of a business or the party who has authorized an agent to act on their behalf.

Interest

The cost of borrowing money, typically expressed as a percentage of the principal, paid by the borrower to the lender for the use of their money.

Nonnegotiable Instrument

A financial document or contract that cannot be transferred or assigned to another party as easily as a negotiable instrument.