Question

Traditional accounting researches find that Earnings quality has decreased over time and usefulness of earnings for stock investors becomes lower. Which of the following could not be a potential reason for these findings?

a. Higher subjectivity for an estimation by a shift toward Balance sheet approach

b. Increase in unreported intangible assets

c.Higher incidence of loss

d. Higher incidence of one-time or special items

Answer 1

c) Higher Incidence of Loss.

Explanation: Traditionally Earning of stock was a major factor but the usefulness of earning has diminished. Option a, b and d lower the importance of earning.

The shift towards the balance Sheet approach is clearly indicating that the investors are giving more importance to the balance sheet than the earning company is making. Increased cases of unreported intangible assets will be taken into consideration in the balance sheet only and not profit and loss therefore it will not affect earning. The incidence of one-time or special items will also not affect earnings.

Incidence of loss will always be reported in earning as negative and will be taken into due consideration. Irrespective of the fact that the incidence of loss has become higher. Therefore it can be concluded that it cannot be a potential reason to the finding that usefulness of earning for stock investor has become lowered.