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Financial Reporting, Financial Statement Analysis and Valuation 9th Edition

Financial Reporting, Financial Statement Analysis and Valuation (9th Edition)

Book Edition9th Edition
Chapter 6, End of Chapter, Questions and Exercises, Exercise 6.1
Page 393

Concept of Earnings Quality. 


The concept of accounting quality has several dimensions, but two characteristics often dominate: the accounting information should be a fair representation of performance for the reporting period and it should provide relevant information to forecast expected future earnings. Provide a specific example of poor accounting quality that would hinder the forecasting of expected future earnings.

Verified Answer

Poor accounting quality may be the result of recording a one-time huge gain or loss without any explanation.


For instance, Company A may record a cost of $50,000 because of embezzlement which is a large proportion of the total cost and gives no further explanation about the nature of the cost. It might lead the analysts to believe that the cost is persistent and recurring. 

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