If ultimately the movements in Balance Sheet that match the funds from profit are the movements in other creditors and other debtors, we must know the reasons of such movements. Such information is usually not available in quarterly report and sometimes not even available in annual report.
The way to deal with such movements is to wait for next quarter’s Balance Sheet. Such increase in other debtors or other creditors should be of temporary. It should be alarming if the amount keep increasing in Balance Sheet for two quarters.
It can be due to something as simple as payment or repayment of rental deposits, down payments of agreement, etc. Therefore it should be either of something one off or short term.
Part 1: Reading financial statements
Part 2: The principle of profit manipulation
Part 3: Detecting profit manipulation - Overview
- Step 1 - Net profit and depreciation
- Step 2 - Net cash or debt movements
- Step 3 - Stocks add trade debtors less trade creditors
- Step 4 - Capital expenditure, goodwill, tax and dividends
- Step 5 - Other debtors and creditors
- Concluding Steps