A company's reported earnings are $2,000 and cash flows are $1,600. Based on economic conditions during the year, the company booked allowances of $150. As a result of contractual incentives, the company booked a further $250 in accruals. What is the amount of unbiased earnings?

Question

Quizplus · Accepted Answer

To calculate unbiased earnings, we need to adjust reported earnings for any additional accruals or allowances that were booked during the year. Therefore, unbiased earnings can be calculated as:
Reported earnings ($2,000) - Allowances ($150) + Accruals ($250) = $2,100 - $150 - $250 = $1,700. 
Since cash flows were $1,600, we can conclude that the company's earnings are biased upwards by $100 ($1,700 - $1,600), making the unbiased earnings equal to $1,750. Therefore, the correct answer is C ($1,750).

A Company's Reported Earnings Are $2,000 and Cash Flows Are