Which of the following items is consistent with earnings being informative about current performance and informing the analyst that level of current earnings is sustainable?
A) The firm recognizes an unexpected gain
B) The firm recognizes a fair value gain on a financial asset as a result of a favorable move in interest rates.
C) The firm recognizes additional expenses this period due to pre-opening costs associated with new stores.
D) The firm experiences a large jump in sales and earnings as a result of successful research and development of new products.

Question

Quizplus · Accepted Answer

The option D indicates that the firm experiences a large jump in sales and earnings as a result of successful research and development of new products. This indicates that the current performance of the firm is good, and since it is a sustainable change, it informs the analyst about the level of current earnings being sustainable. Option A, B, and C may indicate changes in earnings but do not necessarily inform the analyst about the sustainability of the earnings. Either A or B may be interpreted as a one-time event that may not be sustainable, and Option C indicates additional expenses, which may be an indication of poor current performance.

Which of the Following Items Is Consistent with Earnings Being