A company reports much lower operating cash flow than net income across several years. Which of the following is the most relevant further check for an analyst?
Explanation
Divergences between operating cash and net income are often due to working capital timing; analyze receivables, inventory, and payables in relation to sales and COGS.
Other questions
Which of the following best describes the difference between financial reporting quality and earnings quality?
Which phrase best describes the top of the financial reporting quality spectrum?
An analyst finds that a company's reported gross margin rose substantially while cash from operations fell. Which single explanation would be least consistent with high-quality reporting?
Which of the following is a feature of conservative accounting choices?
Which regulator issued 'Guidelines on Alternative Performance Measures' to standardize non-GAAP disclosures across issuers in its jurisdiction?
Under US GAAP, when might management need to establish a valuation allowance against a deferred tax asset?
Which audit opinion paragraph would most likely describe a material weakness in internal control over financial reporting?
A company presents an adjusted EBITDA measure in its earnings release that excludes recurring customer acquisition marketing costs. According to the guidance described in the chapter, how should analysts treat this adjustment?
Which of the following choices is the most appropriate first step when an analyst sees a company repeatedly change the useful lives of its depreciable assets to increase current earnings?
A firm uses LIFO inventory accounting under US GAAP. During inflationary periods LIFO typically results in which of the following outcomes compared with FIFO?
Which of the following is the MOST reliable indicator that a company's non-GAAP EBITDA adjustment excludes recurring costs that will likely recur?
Which of the following would most likely increase the need for a valuation allowance against net operating loss carryforwards?
An analyst comparing two companies finds Company A with a much lower effective tax rate than Company B. Which of the following is LEAST likely to explain the difference?
Which action by management would most likely be classified as 'real earnings management' rather than 'accounting earnings management'?
Which sequence of actions best embodies the 'fraud triangle' elements that enable intentional misreporting?
Which of these is an appropriate reason to exclude a charge from a non-GAAP measure per the guidelines described?
An analyst sees a firm report a large ‘adjustment’ labeled 'integration costs' every quarter. What should the analyst infer?
Which change in a company’s deferred tax asset (DTA) valuation allowance would increase current income tax expense in the period of the change under US GAAP?
Which of the following items is a common method for management to temporarily boost operating cash flow at period-end?
Which example from the chapter is an illustration of improper capitalization of operating costs that materially overstated operating profit?
An analyst notes that a company’s CEO frequently emphasizes an alternative performance measure in earnings releases, giving it more prominence than GAAP net income. What regulatory concern does the chapter identify with that practice?
Which of the following is a practical first analytical step when you see a company with a rising net profit margin but falling operating cash flow?
Which of these is an example of earnings smoothing as discussed in the text?
Which of the following is the clearest red flag of possible channel stuffing?
Which of the following best describes a 'cookie jar' reserve practice?
A company applies IFRS impairment rules for a long-lived asset. Compared to US GAAP, impairment under IFRS is typically:
Which data source does the chapter identify as useful for automating financial-statement data collection via 'smart tags' so analysts can compute ratios automatically?
If a company consistently reports higher 'adjusted EBITDA' than peers by excluding advertising and sales promotion costs, which follow-up is most appropriate?
Which of these is NOT an enhancing qualitative characteristic of decision-useful financial information under the Conceptual Framework (referred to in the chapter)?
Which practice did the SEC caution against by providing interpretive guidance on management discussion and analysis (MD&A) in 2003?
A company's receivables increased 30% while revenue grew 5% year-over-year. Which one-step analytical ratio comparison is the most direct early indicator of potential revenue recognition problems?
A company reports a large, non-cash goodwill impairment. Which of the following should an analyst do first?
Which of the following is a key limitation of relying only on auditor opinions when assessing reporting quality?
Which pattern in a company's segment disclosures was a key SEC concern in its enforcement action against PACCAR?
If a company repeatedly reports high "adjusted EBITDA" growth but cash flow from operations is declining, an analyst should most likely:
Which of these is a common remediation an analyst can apply if management repeatedly uses a non-GAAP metric that excludes recurring operating expenses?
A company declares it will ‘‘indefinitely reinvest’’ certain foreign earnings and not record deferred tax liabilities on those amounts. According to the chapter, how should an analyst treat such disclosures?
Which of the following is most consistent with detecting 'big bath' accounting?
In the context of disclosure quality, which of the following is the best characterization of management commentary (MD&A/management commentary)?
Which of the following observations would most likely prompt an analyst to investigate potential hidden reserves or 'big bath' accounting in prior years?
Which of the following is an example of a permanent difference between accounting profit and taxable income?
Which of the following is the best definition of 'earnings management' as used in the chapter?
An analyst discovers that a firm consistently reports a lower allowance for doubtful accounts than peers with similar receivables aging. The most appropriate immediate analytical response is to:
Which of the following is the clearest example of a 'permanent difference' between accounting and taxable income?
When a firm presents an alternative performance measure in an SEC filing, which of the following is REQUIRED by the SEC rules described in the chapter?
Which of the following is most likely an indicator of poor internal control and an opportunity to manipulate reporting?
Which of the following best describes a practical way analysts can mitigate confirmation bias in their research process?
Which of Porter’s five forces primarily affects a company’s ability to raise prices without losing volume?
An analyst wants to stress-test a financial statement model for a company exposed to commodity cost inflation. Which approach described in the chapter is most appropriate?