Identify potential accounting red flags

• Unexplained changes in accounting rule
• Increasing net profits accompanied by declining cash flow from operations
• A disproportionate increase in accounts receivables in relation to revenue increase
• EPS grows much faster than sales growth (a question of earning sustainability)
• EPS grows much faster than gross margin growth (a question of earning sustainability)
• EPS grows much faster than cash flow from operations (revenues have not materialised into cash)
• A growing gap between reported net earning and its cash flow from operations (generally CFO will be higher than net earnings)
• Unexpected large asset write-offs
• Large fourth-quarter adjustments
• Whether a company capitalised or expenses an item can make a big difference to its results