The quality of earnings tends to be higher for a company that uses accounting principles and methods that lead to a conservative measurement of earnings.

Question

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When a company uses conservative accounting principles and methods, it tends to recognize expenses earlier and recognize revenues later, resulting in a lower net income. This lower net income may be viewed as a more reliable and sustainable level of earnings. Therefore, companies that use conservative accounting principles and methods are more likely to have a higher quality of earnings.

The Quality of Earnings Tends to Be Higher for a Company