Question

CASE 10 KELLY ENTERPRISES, INC. STATEMENT OF CASH FLOWS FOR THE PERIOD ENDED DECEMBER 31, 2018 IN MILLIONS 2018 2017 2016 $900 $800 $450 (706) (230) 25 150 45 (50) 15 25 105 90 65 $499 $690 $655 Cash from Operations Net income Change in accounts receivable Change in accounts payable Change in inventory Depreciation Net cash from operations Cash from Investing Additions to property, plant, and equipment Proceeds from sale of securities Net cash from investing Cash from Financing Borrowings of long-term debt Cash dividends Net cash from financing Increase (decrease) in cash $(950) 5(690) SC790) 25 15 $(925) $(634) 577) $250 $(150) (140) $110 $(316) Ses $121 (133)

Large frauds can often be detected by performing financial statement analysis. Although such analysis can raise areas of concern, not all red flags are the result of fraudulent activities. Reasonable explanations often exist for errors in financial statements. The statement of cash flows is one financial statement that is analyzed in order to identify possible fraud. This statement for Kelly Enterprises, Inc., for a three-year period, is shown in the table on this page.

      1. Identify possible red flags, and Indicate if reasonable explanations exist for the areas of concern.

Answer 1

Answer :

1. Some areas of concern are the rapid growth of receivables without a corresponding increase in inventory. Adding to this concern is the increase in accounts payable. Normally, as accounts payable increase, inventory should also increase.

1. Possible explanations for these trends exist. The company could have had a change in credit policy, allowing for accounts receivable and accounts payable to increase. Also, the possibility exists that the company has sold or discarded obsolete inventory to reduce the amount it carries on the books.