Forensics Journal - Stevenson University 2015 | Page 60

STEVENSON UNIVERSITY

In the above example, the type of analysis performed studies the
amount of time it takes a company to sell its inventory and evaluates
that information against the company’s sales growth. To do this,
a special ratio is used: Days-Sales-In-Inventory (DSI) Index, which
estimates the number of days it takes for a company to convert its
inventory into sales (Figure/Refers). In essence, the higher the ratio,
the longer it takes to convert inventory to sales. As the trend gets
further out of a company’s normal range it could point to concerns
such as inventory mismanagement, overvaluation or obsolescence.
The DSI analysis in this particular case employed horizontal analysis,
whereby the analyst compares changes that occur between two periods
for the same company.

calculate the DSI “Change over Previous Year Period” (Antar, July 22,
2014). This calculation continued to increase in every quarter except
June 30, 2012. As an example, the DSI “Change over Previous Year
Period” was up 43.7% in March, 2012 and had risen to 132.3% by
March, 2014 (Antar, July 22, 2014). In addition, inventory measured
at the lower of cost or market had risen from 7% to 175.5% during
the past several quarters (Antar, July 22, 2014). This meant that the
increase in inventory was significantly higher than the increase in
Cost of Goods Sold, during the same period of time. While inventory
grew at a rate of 175.5%, in the first quarter 2014, the Cost of Goods
Sold only grew 18.6% (Antar, July 22, 2014). Since this pattern
was consistent in several previous quarters it pointed to the same
conclusions as the DSI analysis according to Mr. Antar (Antar, July
22, 2014).

Figure 1
Ending Inventory
Cost of Goods Sold

X Number of Days in Period = Days’ Sales Inventory Index

DSR Index
Calculating a company’s Days-Sales-in-Receivable (DSR) Index
is another meaningful measure that can be used in financial data
analysis. This analysis examines a company’s sales figures in relation
to its receivables figures to assess overall financial health of receivables.
The index determines the number of days it typically takes a company
to convert its accounts receivable into cash. Since the DSR measure
links sales and receivables figures together, a substantial increase in
the index could be indicative of fictitious receivables and sales. See
Figure 3 for DSR calculation.

Source: White Collar Fraud Blog, by Sam E. Antar, Tuesday July 22, 2014 http://www.
whitecollarfraud.blogspot.com/2014/07/do-nu-skin-inventory-red-flags-spell.html

In Mr. Antar’s initial blog post of July 22, 2014, he highlights the
financial details, calculations and exhibits that show a growing trend
of inventory buildup at Nu Skin based on its Days-Sales-In-Inventory
measurement. Figure 2, below shows that in each quarter presented
the “DSI Current Period” and “DSI Previous Period” is used to
Figure 2
Nu Skin Enterprises
Selected Financial Information
$in millions

Quarter
Ended

Revenue
Guidance
(Min.)

Revenue
Guidance
(Max.)

Reported
Revenues

Excess
Revenues
over
Maximum
Revenue
Guidance

3/31/14

$650

$670

$671.1

$1.1

$106.7

18.6%

$410.7

175.5%

346.4

149.1

132.3%

12/31/13

$1,020

$1,050

$1,055.8

$5.8

$164.7

73.2%

$339.7

150.0%

189.8

135.1

44.3%

9/30/13

$790

$810

$908.3

$98.3

$139.8

61.2%

$254.2

85.4%

167.3

145.5

15.0%

6/30/13

$570

$580

$671.3

$91.3

$111.3

16.4%

$178.2

42.9%

145.7

118.7

22.7%

3/31/13

$500

$510

$541.3

$31.3

$90.0

18.7%

$149.1

23.5%

149.1

144.9

2.9%

12/31/12

$520

$530

$579.2

$49.2

$95.1

18.6%

$135.9

21.2%

131.5

128.6

2.2%

9/30/12

$465

$480

$519.7

$39.7

$86.7

22.8%

$137.1

30.1%

145.5

137.3

5.9%

6/30/12

$490

$500

$577.2

$77.2

$95.6

34.3%

$124.7

15.0%

118.7

138.6

-14.3%

3/31/12

$437

$447

$456.2