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The financial crisis of 2008 was one of the most significant economic disasters in world history. Even though numerous countries and separate businesses were caught by surprise by the emerged problems, many experts state that the crisis could be predicted. In particular, the accounting information of KB Home, including the inventory, earnings, stock price, and cash flow, could be used to predict the financial crisis.
It is possible to state that the changes in numerous accounting indicators demonstrated that some economic problems were approaching. Firstly, one should explain that the companys inventories were a significant indicator. While KB Home was increasing its inventories from 2002 to 2006, an abrupt reduction in 2007 predicted the crisis. Secondly, a similar situation was found with the net income and stock price figures because these indicators witnessed significant decreases in 2006. Thirdly, KB Homes cash flows did not follow the same strategy as above because it peaked in 2007. Even though this state of affairs is not harmful on its own, it predicts further problems when compared to the firms accrual component. In 2007, the companys accruals were almost two times larger than the cash flow. As a result, it was highly probable to expect the upcoming year to bring crucial financial challenges.
In conclusion, the selected accounting indicators, including inventories, net income, stock price, accruals, and cash flow, demonstrated in 2006-2007 that KB Home was going to meet fundamental challenges. Since this business was a part of an extensive economic system, it was reasonable to consider whether other companies had the same or similar problems. Such an analysis could help identify the issues that were affecting many organizations, and fact could predict the impending financial crisis.
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