Case 5-2 Earnings Quality
Economic income is considered to be a better predictor of future cash flows than accounting income is. A technique used by securities analysts to determine the degree of correlation between a firm’s accounting earnings and its true economic income is quality of earnings assessment.
a.Discuss measures that may be used to assess the quality of a firm’s reported earnings.
b.Obtain an annual report for a large corporation and perform a quality of earnings assessment.
Schroeder, Richard G., Myrtle Clark, Jack Cathey. Financial Accounting Theory and Analysis: Text and Cases, 11th Edition. Wiley, 2013-11-04. VitalBook file.