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.
- 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 ...