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LOS 38. a compare financial reporting quality with the quality of reported…
LOS 38. a compare financial reporting quality with the quality of reported results (including quality of earnings, cash flow, and balance sheet items)
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quality of earnings
different from quality of earning reports (one is whether the reporting is of high quality, the other is if the actual earning is of high quality)
sustainability of earnings = determined by proportion of reported earnings that can be expected to continue in the future
increase in reported earnings from exchange rate or sale of assets that have appreciated over periods are not sustainable
increase in reported earnings (higher profits) from increased effeciency or market share is considered sustainable
one dollar of high quality earning adds more value to company than one dollar of low quality earning
linking back to sustainability, one dollar of high quality earning is more likely to continue in the future which increases their impact on firm
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on the other hand, a dollar of earning from exchange rate fluctuations for example is not expected to continue which limits its impact on future earnings of the company (so less impact on value estimates of a company = how much a company is worth)
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sustainability of cash flows is also considered when determining quality of earnings. Balance sheet items are also important
inadequate accruals for probable liabilities (maybe accrual 写少了) // overstatement of assets = both decrease quality of reported earnings and 让人质疑 sustainabiity of earnings
so its highly possible that company has high financial reporting quality but low quality of reported earningfs
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