Question

‘Management judgment, estimate, or choice could increase balance sheet quality but potentially impair earnings quality or...

‘Management judgment, estimate, or choice could increase balance sheet quality but potentially impair earnings quality or decrease both balance sheet and earnings quality’. Do you agree? Why or why not?

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Answer #1

Ans-

  • A company's real quality of earnings can only be revealed by spotting and removing any anomalies, accounting tricks, or one-time events that skew the numbers.
  • Quality of earnings is the percentage of income that is due to higher sales or lower costs.
  • An increase in net income without a corresponding increase in cash flow from operations is a red flag.
  • Tracking activity from the income statement through to the balance sheet and cash flow statement is a good way to gauge quality of earnings.
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