Question

Economic income is considered to be a better predictor of future cash flows than accounting income...

Economic income is considered to be a better predictor of future cash flows

than accounting income is. A technique used by security analysts to determine

the degree of correlation between a firm’s accounting earnings and its

true economic income is quality of earnings assessment.

Required:

Obtain an annual report for a large corporation and perform a quality of

earnings assessment?

Business   Accounting   
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Answer #1

Economic profit is the measure of the resources generated by the firm in excess of what is used by the firm. Mathematically, it is the net present value of earnings from the firm estimated on the basis of the probable life period of the firm. Or it can be based on the cash generated by the firm multiplied by the PV fact or for the estimated life of the firm. On the other hand, accounting profit is base d on accrual concepts and is calculated by taking all the revenues and gains and deducting the expenses and losses

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