Which one of the following is used as an indicator that a firm has good-quality earnings?
A) declining price-earnings ratios
B) constant price-earnings ratios
C) cash flow per share that exceeds earnings per share
D) earnings per share that exceed cash flow per share
E) positive earnings per share

Question

Quizplus · Accepted Answer

Cash flow is a more reliable indicator of a firm's earnings quality as it reflects the actual cash generated by the firm's operations. A cash flow per share that exceeds earnings per share indicates that the company has generated more cash than it has reported in earnings, which is a positive sign of good-quality earnings. Choices A, B, and E refer only to price-earnings ratios, which do not necessarily reflect the quality of a firm's earnings. Choice D implies that a company's cash flow is lower than its reported earnings, which could be a red flag for poor-quality earnings.

Which One of the Following Is Used as an Indicator