What are Red Flags in Financial Statements?

A warning or indicator that there may be a problem or threat with a company’s stock, financial accounts, or news reports is known as a red flag. Any unfavorable trait that jumps out to an analyst or investor is a red flag.

Primarily, there are four reports where the reader can find information about the company’s performance:

Auditor’s Report (Raport Biegłego Rewidenta)

the statement preparerd by the statment’s auditors that presents opinions based on their findings.

Financial Statement

the statement which is a collection of reports that present company’s financial position such as: the balance sheet (bilans), income statement (rachunek zysków i strat), statement of cash flows (rachunek przepływów pieniężnych), statement of changes in equity (zestawienie zmian w kapitale własnym).

Notes to the Financial Statemeent

this report includes explanations and disclosures for any odd entries or items.

Management’s Discussion and Analysis

this is a note from managment that presents any information that is to be communicated to the company’s shareholders and readers of the report.

All the above Financial Statements provide information about the company’s performance. Some problems may be spotted early by the management in order to prevent future headaches, but also by an auditor who is supposed to write an opinion, which could be invaluable for the reader such as an investor.

Some examples of Red Flags include:

1. Inventory (zapasy) (goods available for sale and raw materials used to produce goods available for sale) going up or unexplained inventory variances (różnice, rozbieżności), missing documentation, particularly related to the receiving and shipping processes, unexplained credits and write-offs (odpisy aktualizujące) to inventory.

2. Increase in Receivables (należności) (money owed to a company by its customers for goods or services that have been delivered or used but not yet paid for)

3. Disposal of Fixed Assets (aktywa trwałe rzeczowe) (a long-term tangible piece of property or equipment that a company owns and uses in its operations to generate income)

4. Poor Cash Flow (przepływy pieniężne) (the net amount of cash and cash equivalents being transferred into and out of a business)

5. Revenue (Przychody) (sales or turnover) Manipulation

6. Complex Transactions