International Financial Statement Analysis Workbook, 3rd Edition

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 ...