1. While a firm’s sales and net income have been steady during the last three years, the firm has experienced a decrease in its accounts receivable and inventory turnovers and an increase in its accounts payable turnover. What is the likely direction of change in cash flow from operations? How would your answer be different if sales and net income were increasing?
2. The concept of accounting quality has several dimensions, but two characteristics often dominate: the accounting information should be a fair representation of performance for the reporting period and it should provide relevant information to forecast expected future earnings. Provide a specific example of poor accounting quality that would hinder the forecasting of expected future earnings.
3. Identify and explain conditions that would lead an analyst to expect that management might attempt to manage earnings upward and conditions that would lead to expectations of managing earnings downward.