Which is a better indicator of a firm’s quality of earnings, CFO or Net Income? Why?
Which is a better indicator of a firm’s quality of earnings, CFO or Net Income? Why?
Homework Answers
Quality of earnings refers to the percentage of earnings from
the core operating activities. Net income will also include "other
income". Companies may earn other income from interests (for non
banking or non financial institutions), rent or asset sale which
may not continue for coming periods. If there is an increase in a
firm's profit due to increase in sales or cost reductions, then it
is considered that the quality of earnings is high.
CFO or the cash flow from operations is a better indicator of a
firm’s quality of earnings because it considers only the cash flow
that a business generates from its operations.
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Which is a better indicator of a firm’s quality of earnings, CFO
or Net Income? Why?
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