Judge how good a company's financial reports are

Putting the framework to work means tying specific numbers to specific concerns. Receivables growing much faster than sales suggest aggressive revenue recognition or channel stuffing. Inventory growing faster than cost of sales may signal obsolete stock; lengthening depreciation lives or reserve releases can lift profit without better operations. The Beneish model combines such signals: a days sales in receivables index above 1, gross margin index above 1, asset quality index above 1 and high accruals raise the M-score, and a score above about −1.78 suggests likely manipulation. Findings should be weighed together and against the business story. The trap is to condemn a company on one ratio when the business may genuinely have changed.