CHAPTER 17 EVALUATING QUALITY OF FINANCIAL REPORTS

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.

SUMMARY OVERVIEW

  • The quality of financial reporting can be thought of as spanning a continuum from the highest quality to the lowest.
  • Potential problems that affect the quality of financial reporting broadly include revenue and expense recognition on the income statement; classification on the statement of cash flows; and the recognition, classification, and measurement of assets and liabilities on the balance sheet.
  • Typical steps involved in evaluating financial reporting quality include an understanding of the company's business and industry in which the company ...

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