To The Moon

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Hey, tigers：

Today is the third day of the column of " Financial reports for beginners "

In this article, I mainly introduce: how to identify companies are suspected of fraud?

Fraud in listed companies often happens. Today I will help you to summarize the common 4 kinds of fraud:

1. Financial fraud associated with accounts receivable

Accounts receivable refers to the money a company should have received for goods or services but not yet paid for by its customers.

As customers, we are familiar with cash on delivery and deferred payment. Deferred payment is accounts receivable for the seller, i.e. the company.

To avoid common pitfalls, we must pay extra attention to the following two situations:First, accounts receivable increases much faster than revenue, and the speed of collection is slower than industry average or appears to be slowing down.Second, accounts receivable take up a great proportion of the company's revenue, and 30% of which is over 1 year.

You should question about the company's revenue when you detect the two situations.

2.Financial fraud associated with inventory

Most products, such as fruits or pastry, have a quality guarantee period, beyond which, the value of the products will significantly decrease.

Some companies deliberately don't make allowance for depreciation of inventory in order to decrease expenses, increase profit and thereby dress up the financial report.Moreover, many companies illegally forge orders to make funds flow out.

They then will use these funds to buy their own products in the name of other companies in order to fraudulently increase profit.

This kind of fraud often causes inventory growth to exceed the same period of time.But you can't make money by spending money on your own products, and you may have increased savings costs due to inventory backlogs.

There is even a risk that the value of the inventory will reduce to zero when the product becomes obsolete.So you should be wary of manufacturing companies whose inventories increase and decrease rapidly at certain times on their earnings.

3.Financial fraud associated with fixed assets

The market price of fixed assets, like equipment, may continue to fall because of obsolescence and idleness, which makes their realizable value is lower than book value.

Thus, this equipment needs to be depreciated. However, some listed companies deliberately do not make provision for falling prices of the company's fixed assets in order to increase current profits.

In this regard, the fraudulent method of fixed assets is somewhat similar to that of inventories.When it comes to fixed assets, we should bear in mind two key points:1. Fixed assets will suffer wear and tear and eventually be scrapped. Therefore, it is necessary to depreciate it over its economic life.2.Apart from depreciation, it is necessary to carry out impairment tests.

4.Financial fraud associated with goodwill​

What is goodwill?

Now we will talk about the concept of goodwill. Goodwill refers to the capitalized value of a company's ability to generate profit above the recognizable book value of the company's assets.

In fact, goodwill is an intangible asset. It can be regarded as a "brand effect" in the eyes of consumers.For example, if you want to buy a chocolate bar and are not familiar with chocolate, which product will you choose: Dove's or another unknown brand?

I believe there is a good chance you will choose Dove as its advertising creates goodwill which is associated with brand and quality in the eyes of consumers.

This goodwill will help the company secure a higher premium.

Thus, a company with higher goodwill can justify a higher price than their competitors. Goodwill is an intangible asset that brings solid profit to a company.

How is financial fraud committed in association with goodwill?As a matter of fact, goodwill sometimes suffers impairment as well. If the deals fail, then goodwill is impaired.

If no provision is made in order to make the financial report look good for the current period, there is the risk that profit will fall sharply in the future when a large amount of impairment needs to be made.

Goodwill impairment will happen sooner or later. Listed companies have the discretion whether to do it slowly or all at once. Thus, goodwill impairment is a key lever for listed companies to manipulate profit.

Above, it is common four kinds of listed company fraud.In this article, we focus on the four common types of financial fraud.No matter what kind of fraud occurs, as long as we read it more carefully,

it's easy to find these "tricky" numbers. Read the financial report with a method, and you will surely do well!

Here is the course link: US Stock Financial Statements for Beginners ！Be sure to pay attention.

What is your opinion on financial fraud?  

Please share with tigers.​​ you will get 20-50 coins

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