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Ebook Strategic management and business policy (13th edition): Part 2

(BQ) Part 2 book "Strategic management and business policy" has contents: Suggestions for case analysis, strategic issues in managing technology & innovation, strategic issues in entrepreneurial ventures & small businesses, strategic issues in not for profit organizations,.and other contents. | PA R T Introduction to Case Analysis 5 CHAPTER 12 suggestions for Case Analysis Howard Schilit, founder of the Center for Financial Research & Analysis (CFRA), works with a staff of 15 analysts to screen financial databases and analyze public financial filings of 3,600 companies, looking for inconsistencies and aggressive accounting methods. Schilit calls this search for hidden weaknesses in a company’s performance forensic accounting. “I’m like an investigative reporter,” explains Schilit. “I’m interested in finding companies where the conventional wisdom is that they’re very healthy, but if you dig a bit deeper, you find the emperor is not wearing the clothes you thought.”1 He advises anyone interested in analyzing a company to look deeply into its financial statements. For example, when the CFRA noticed that Kraft Foods made $122 million in acquisitions in 2002, but claimed $539 million as “goodwill” assets related to the purchases, it concluded that Kraft was padding its earnings with one-time gains. According to Schilit, unusually high goodwill gains related to recent acquisitions is a red flag that suggests an underlying problem. Schilit proposes a short checklist of items to examine for red flags: { Cash flow from operations should exceed net income: If cash flow from operations drops below net income, it could mean that the company is propping up its earnings by selling assets, borrowing cash, or shuffling numbers. Says Schilit, “You could have spotted the problems at Enron by just doing this.”2 { Accounts receivable should not grow faster than sales: A firm facing slowing sales can make itself look better by inflating accounts receivable with expected future sales and by making sales to customers who are not credit worthy. “It’s like mailing a contract to a dead person and then counting it as a sale,” says Schilit.3 { Gross margins should not fluctuate over time: A change of more than 2% in either direction from year to year is worth a closer .