Chapter 4More Unsustainable Boosts to Earnings


Revenue recognition and inventory management are key predictors of poor earnings quality, but the balance sheet and income statement offer more playgrounds for management manipulation. This chapter combines these important balance sheet and income statement concerns organized by the balance sheet’s categories of assets, liabilities, and owners’ (shareholders’) equity. It’s important to know this most basic of all relationships: assets = liabilities + shareholder equity. In these three categories you’ll find a number of line items to analyze to better assess, whether revenues are overstated, expenses understated, or cash flow unsustainable. (We covered the all-important inventory line in the last ...

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