One step in assessing the quality of earnings is to look for red flags. An example of a red flag is a significant increase in accounts receivable without commensurate growth in sales (that is, accounts receivable turnover decreases). List and discuss at least five other red flags the astute analyst might look for, explain why each is a red flag, and identify where the analyst might find this information.
Using your example, discuss how monitoring the financial results of a company’s competitors over time might help raise or explain red flags.
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