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Red Flags that might affect analysts' decisions.

One step in assessing the quality of earnings is to look for red flags. An example of a red flag is a significant increase in accounts receivable without commensurate growth in sales (that is, accounts receivable turnover decreases). can you list and discuss at least five other red flags the astute analyst might look for, explain why each is a red flag, and identify where the analyst might find this information

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Operating an investment where the project's cost of capital is higher than the internal rate of return (IRR). IRR is the project's expected rate of return. If this return exceeds the cost of the funds used to finance the project, then the excess goes to the firm's stockholders (Brigham & Houston, 2007). Therefore, when IRR is less than the cost of capital, the project will not generate enough revenues to provide stockholders with enough returns. The analyst may find this information in the analysis of capital budgeting.

A shorter payables deferral period with an increase in days sales outstanding (DSO) is another red flag. A longer period of days' sales outstanding with shorter payables deferral period will cause cash ...

Solution Summary

This solution is comprised of events that may result in red flags impression in financing that may cause a change in the analysts' decisions.