When assessing earnings quality, financial analysts are concerned that management may attempt to manipulate information to make earnings appear better or worse than they really are. Which of the following would NOT suggest poor earnings quality?
A) reduction of the allowance for doubtful accounts
B) consistent application of GAAP
C) significantly higher net income than cash flows from operations
D) reliance on share issuances to offset repeated negative cash flow from operations

Question

Quizplus · Accepted Answer

Consistent application of GAAP suggests that the company is following accounting standards and principles, which is a positive indication of earnings quality. A reduction of the allowance for doubtful accounts (A) may suggest that management is manipulating earnings by artificially reducing expenses. Significantly higher net income than cash flows from operations (C) may suggest that the company is using accounting techniques to boost earnings, making it a poor indicator of earnings quality. Reliance on share issuances to offset repeated negative cash flow from operations (D) may suggest that the company is struggling to generate positive operating cash flows, which is also a poor indicator of earnings quality.

When Assessing Earnings Quality, Financial Analysts Are Concerned That Management