Accounts Receivables & Inventories
Analyzing accounts receivable and inventory levels is arguably the most widely used method for spotting red flags.
Unlike when they sell to us, a company doesn’t usually require payment in advance when it sells to another firm. Instead, it bills the customer and specifies a payment due date. Accounts receivables are the monies owed by customers for goods already shipped and billed. Normally, you’d expect the receivables total to more or less track sales. That is, if sales double, receivables should double also.
You can compare a company’s accounts receivables to an earlier period, or even to a different company’s receivables, by dividing the receivables by sales. You can use either the ...