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International Financial Statement Analysis, 3rd Edition by Anthony T. Cope, Michael A. Broihahn, Wendy L. Pirie, Elaine Henry, Thomas R. Robinson

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CHAPTER 17

EVALUATING QUALITY OF FINANCIAL REPORTS

Jack T. Ciesielski, Jr., CFA

Elaine Henry, CFA

Thomas I. Selling

LEARNING OUTCOMES

After completing this chapter, you will be able to do the following:

  • demonstrate the use of a conceptual framework for assessing the quality of a company's financial reports;
  • explain potential problems that affect the quality of financial reports;
  • describe how to evaluate the quality of a company's financial reports;
  • evaluate the quality of a company's financial reports;
  • describe the concept of sustainable (persistent) earnings;
  • describe indicators of earnings quality;
  • explain mean reversion in earnings and how the accruals component of earnings affects the speed of mean reversion;
  • evaluate the earnings quality of a company;
  • describe indicators of cash flow quality;
  • evaluate the cash flow quality of a company;
  • describe indicators of balance sheet quality;
  • evaluate the balance sheet quality of a company;
  • describe sources of information about risk.

1. INTRODUCTION

The ability to assess the quality of reported financial information can be a valuable skill. An analyst or investor who can recognize high-quality financial reporting can have greater confidence in analysis based on those financial reports and the resulting investment decisions. Similarly, an analyst or investor who can recognize poor financial reporting quality early—before deficiencies become widely known—is more likely to make profitable investment decisions or to reduce or even avoid ...

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