Earning quality is defined as how well firm's earnings represent future cash flows. Several factors affect...

Earning quality is defined as how well firm's earnings represent future cash flows. Several factors affect earnings quality. Which statement is NOT TRUE ?

Group of answer choices

Accounting users should assess the quality of a company's earnings because reported accounting earnings number is not exactly equal to economic earnings.

Current cash flow is a better proxy for future cash flows than current earnings

Earnings quality can be defined as the degree of correlation between accounting earnings and its economic income

Conservatism may decrease earnings quality

Solutions

Expert Solution

Option (b) is correct. Earnings better predict the future cash cash flow than the current cash flow and difference varies within the operating cycle. The statement, "Current cash flow is a better proxy for future cash flows than current earnings" is NOT TRUE.

Option (a) is incorrect. Accounting earnings is misunderstood with economic earnings. They are not exactly equal. The statement,"Accounting users should assess the quality of a company's earnings because reported accounting earnings number is not exactly equal to economic earnings" is TRUE.

Option (c) is incorrect. Earning quality has been defined as degree of convergence between accounting earnings and economic income. The statement,"Earnings quality can be defined as the degree of correlation between accounting earnings and its economic income" is TRUE.

Option (d) is incorrect. Increase in the level of conservatism consequently decrease the quality of earnings. The statement,"Conservatism may decrease earnings quality" is TRUE.

The statement, "Current cash flow is a better proxy for future cash flows than current earnings" is NOT TRUE.

ekkarill92 answered 11 months ago

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