Question Which of the following activities of Sweet Home A/B would indicate to Nyberg a lower quality of earnings for the company? Select exactly 1 answer(s) from the following: A. Their choice of inventory method. B. Their choice of depreciation method for fixed assets. C. The relationship between accounts payable and cost of goods sold. D. The relationship between the changes in cash from operations and net income.
A
The answer was C as they were stretching payables. Though I thought D looked good.
I think D too… Stretching Payables = Increase in CFO due to NWC Decrease…therefore Higher CFO but same NI
Stretching payables is a no-no.
^ yah I know, but which answer is the correct one? C or D? its a big strange as it says lower quality earning but relationship between A/P and COGS has nothing to do with earnings directly…but does effect CFO…ok I am all confused now…
Well if I remember NI and CFO didn’t differ THAT much. Remember they are allowed to be different and its not a manipulation sign just b/c they don’t match up.
If I remember right, NI and CFO were both increasing. That is okay. It is when NI is increasing and CF is negative or decreasing does that signal a possible problem. Stretching out payables is a short term increase in CF that cannot be sustained.
Same thought again pinkman. Thanks for not using 20 computers for your Qbank practice last night.
Haha. Yeah I only used 10 last night. Winding down.
it is C given by them
What was their inventory policy? LIFO or FIFO?