Question

10. Which statement about financial quality red flags and restatements is most likely FALSE:

a. Royal Ahold’s vendor allowances made revenues appear to be larger

b. Royal Ahold’s vendor allowances made operating margin appear to be larger

c. Academic studies demonstrate that increased regulation reduces the likelihood of restatement

d. When economic conditions are deteriorating, quality companies tend to outperform the market

e. A large increase in accounts receivable could indicate a company is channel stuffing, an aggressive form of revenue recognition that is not necessarily illegal

Answer 1

Answer: Option "d" is the answer that says, " When economic conditions are deteriorating, quality companies tend to outperform the market"

Other statements are true about Red flags and Restatement except the above one.

When economic conditions are not favourable and deteriorating then no company can outperform in the market, not even the quality companies. Companies cannot perform well if economic conditions are not good. When there won't be any demand, to whom companies will sell? The production will come down automatically because of lower or no demand.

Here are most common red flags:

1. Receivables
2. High inventories
3. Disposal of Fixed assets
4. Poor cash flow pattern
5. High expenditures