Quality of earnings is generally lower the more liberal the accounting methods used by a company.

Question

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Quality of earnings refers to the level of earnings that is deemed sustainable over the long term. If a company uses liberal accounting methods, it may report higher earnings in the short term, but these earnings may not be sustainable and may be prone to manipulation. This lowers the quality of earnings as they are not a true representation of the company's actual financial health. Therefore, the more liberal the accounting methods used by a company, the lower the quality of its earnings.

Quality of Earnings Is Generally Lower the More Liberal the Accounting