Large frauds can often be detected by performing financial statement analysis. Although such analysis can raise areas of concern, not all red flags are the result of fraudulent activities. Reasonable explanations often exist for errors in financial statements.

The statement of cash flows is one financial statement that is analyzed in order to identify possible fraud. This statement for Kelly Enterprises, Inc., for a three-year period is shown below.

1. Identify possible red flags.

2. Indicate if reasonable explanations exist for the areas of concern.

KELLY ENTERPRISES, INC. STATEMENT OF CASH FLOWS FOR THE PERIOD ENDED DECEMBER 31, 2018 IN MILLIONS 2018 2017 2016 Cash from Operations Net income $900 $800 $450 Change in accounts receivable (706) (230) 25 Change in accounts payable 150 45 90 Change in inventory (50) 15 25 Depreciation 105 90 65 Net cash from operations $499 $690 $655 Cash from Investing Additions to property, plant, and equipment $(950) $(690) $(790) Proceeds from sale of securities 25 56 15 Net cash from investing $(925) $(634) $(775) Cash from Financing Borrowings of long-term debt $250 S(150) $34 Cash dividends (140) (85) (45) Net cash from financing $110 $65 $(11) Increase (decrease) in cash $(316) $121 $(131)