b. By applying interim analysis instead of relying on annual data, one can identify abnormalities and assess the quality of a company’s financials towards the end of a period, which helps determine whether or not a manager is window-dressing (manipulating) their financial statements (Subramanyam, 2014). More specifically, one can examine the company’s accounts receivable, current liabilities, and inventory liquidity measures to detect specific unethical actions (Subramanyam, 2014). For example, a company may offer incentives or discounts to customers for early payment or acceptance of goods/services, which can accelerate both the accounts receivable turnover and days’ sales in receivable measures for that period (Accounting Tools, 2016; Subramanyam, 2014). Subra...
... middle of paper ...
...and operating cash flow to compensate for their fixed charges and preferred dividends. As a result, Kimberly Corporation is producing $8.71 and $3.98, respectively, to every one dollar of fixed charges and preferred dividends. Similarly, the company is creating $10.57 of pre-taxed cash from their operations to every one dollar devoted to fixed charges. These values are favorable for investors when evaluating both the company’s liquidity and solvency, which highlights their encouraging short-term and long-term growth potential as well as their ability to meet their interest and dividend payments (Subramanyam, 2014). Moreover, since Subramanyam (2014) states there is a distinct correlation between higher coverage values and lower default risks, creditors can classify the Kimberly Corporation as low-risk and possessing a large borrowing capacity (Subramanyam, 2014).
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