Question

Earnings Quality Economic income is considered to be a better predictor of future cash flows than accounting income is. A technique used by securities analysts to determine the degree of correlation between a firm’s accounting earnings and its true economic income is quality of earnings assessment.

Required: Discuss measures that may be used to assess the quality of a firm’s reported earnings. Obtain an annual report for a large corporation and perform a quality of earnings assessment.

Answer 1

Above question is about , Discuss measures that may be used to assess the quality of a firm’s reported earnings. Obtain an annual report for a large corporation and perform a quality of earnings assessment. Refer the below images for the above asked questions in a detailed way of explanation.

Requirement the quality used O: Discuss measures of a firm's reported to assess that may be earnings. Answer: A major purpose of income reporting is to allow investors to predict future cash flows. Despite the evidence that accounting earnings are good indicators of stock retoms, the use of the transactions approach to income determination along with the Principle of Conservatism, and the materiality constraint, have led Secority analysts to the conclusion that economic income, rather than accounting income is a better predictor of future ws. Earnings quality is defined as the degree of ween a company's accounting income and its economic Income several techniques have been developed to use in assessing earnings aquality including: - Compare the accounting principles employed by the company with those generally used in the indostry and by competitions. Do the principles used by the company inflate earnings? - Review recent changes in accounting prinuples and changes in estimates to determine if they inflate earnings. - Determine have been Attempt to expense, are if discretionary postponed by assess whether not reflected expenditures such as advertising comparing them to previous periods. some expenses, such as warranty on this income Statement. - Determine the replacement cost of inventories assets. is the company generating sufficient to replace their assets? and cash other flow

- Review it loss earnings the notes contingences and cash to financial exist that flows. Statements might to redule determine future Review the relationship between sales and receivables determine if receivables are increasing more rapidly than Sales - Review the management discussion and analysis Section of the annual report and the auditor's opinion to determine management's opinion of the company's future and to identify any major accounting issues. Requirement ? Obtain an annud report for a large corporation and perform a quality of earnings assessment. newer: The answer to this part of the case is dependent upon the company selected. The students should be able to address all, con, at least, most of the above issues and reference the section of the annual report that contained the relevant information. However, below are the some measures that may be used to assess the quality of a firm's reported earnings Techniques, numbers, trends and factor can be used to assess the quality of earnings.