When assessing earnings persistence, it is important to analyze discretionary expenditures. Which of the following is correct?

I. Research and development is generally considered a discretionary expenditure.
II. Decreased discretionary expenditures should always be taken as a positive indicator that the company is getting costs under control.
III. Advertising expenditures can be considered discretionary expenditures, which often have implications for future sales.
IV. Absolute levels of discretionary expenditures are more important than the level of expenditures relative to sales.

A)I, II, and III
B)I, III, and IV
C)II, III, and IV
D)I and III

Question

When assessing earnings persistence, it is important to analyze discretionary expenditures. Which of the following is correct?

I. Research and development is generally considered a discretionary expenditure.
II. Decreased discretionary expenditures should always be taken as a positive indicator that the company is getting costs under control.
III. Advertising expenditures can be considered discretionary expenditures, which often have implications for future sales.
IV. Absolute levels of discretionary expenditures are more important than the level of expenditures relative to sales.

A)I, II, and III
B)I, III, and IV
C)II, III, and IV
D)I and III

Quizplus · Accepted Answer

I and III are correct because research and development (R&D) and advertising expenditures are considered discretionary, meaning companies can adjust these expenses based on their financial situation. These expenditures can have implications for future sales and innovation, making them important for assessing earnings persistence. II is incorrect because decreased discretionary expenditures are not always positive; they could signal a company is cutting back on investment in future growth. IV is incorrect because the level of discretionary expenditures relative to sales is often more telling than absolute levels, as it provides context regarding the company's investment in growth relative to its size.

When Assessing Earnings Persistence, It Is Important to Analyze Discretionary