Likewise error on estimating the accrual has also been used in measuring the

Likewise error on estimating the accrual has also

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accrual quality. Likewise, error on estimating the accrual has also been used in measuring the quality of accrual. So far the first method that focus on magnitude and second focusing on error on estimating accrual are commonly used as proxy for earnings quality. The large the value obtained from each method imply poor earnings quality and small value obtained from each method indicates high quality earnings. Predictability Predictability of earnings represents the ability of the reported earnings to predict future component of operating income. The higher ability to predict future earnings indicates high earnings quality and poor ability to predict future earnings indicates poor earnings quality Smoothness The term income smoothing refers to effort done by managers of entity to reduce irregular variation in earnings. Managers exercises their power to reduce abnormality on the earnings as means to inform interested users about their assessment of the future earnings to the degree allowed by accounting standard. In this context, smoothened earnings indicates high earnings quality that users of accounting information need, likewise un-smoothened represents poor quality earnings.
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Earning Surprise indicator Earnings surprise indicator is given by value of net operating assets at begging scaled by total sales. Large the ratio of earnings surprise indicates poor earnings quality and small ratio indicates high earnings quality.
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  • Spring '17
  • Generally Accepted Accounting Principles

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