Earnings Quality: Conclusion
  1. Earnings Quality: Introduction
  2. Earnings Quality: Understanding Accounting Standards
  3. Earnings Quality: Defining "Good Quality"
  4. Earnings Quality: Why Aren't All Earnings Equal?
  5. Earnings Quality: Reviewing Non-Accrual Items
  6. Earnings Quality: Measuring Accruals
  7. Earnings Quality: Adjusting Accruals For Proper Comparisons
  8. Earnings Quality: Analyzing Specific Accrual Accounts
  9. Earnings Quality: Investigating The Financing Of Accruals
  10. Earnings Quality: Measuring The Discretionary Portion Of Accruals
  11. Earnings Quality: Conclusion

Earnings Quality: Conclusion

By Tim Keefe,CFA (Contact Author | Biography)

A firm's reported earnings number has typically been the focus of Wall Street, Main Street and the media. Other aspects of financial statements get overlooked, even though these items may provide information about the quality of firms' reported earnings. This tutorial describes a process that will assist you in determining to what degree the reported earnings have been manipulated by management. The results of the analysis won't deliver a definitive thumbs-up or thumbs-down regarding the quality of earnings, but it will enable you to better understand the risks in the firm's accounting for earnings.
Here, we've examined key issues relating to earnings quality, including the attributes of a high-quality earnings number and the tradeoff between relevance and reliability. The discussion noted that earnings quality will vary even when managers follow GAAP with the best intentions. Furthermore, not every change in accounting policy and accruals signals an attempt to manipulate reported earnings.

In order to determine the degree of earnings quality, investors must look at factors outside the financial reporting system that can affect earnings quality. Investors must also identify the types of accounts companies are most likely to manage and the circumstances in which earnings management is most likely to occur. Finally, investors can use metrics to quantify the degree of earnings management and some methods used to compare these metrics over time and across firms.


  1. Earnings Quality: Introduction
  2. Earnings Quality: Understanding Accounting Standards
  3. Earnings Quality: Defining "Good Quality"
  4. Earnings Quality: Why Aren't All Earnings Equal?
  5. Earnings Quality: Reviewing Non-Accrual Items
  6. Earnings Quality: Measuring Accruals
  7. Earnings Quality: Adjusting Accruals For Proper Comparisons
  8. Earnings Quality: Analyzing Specific Accrual Accounts
  9. Earnings Quality: Investigating The Financing Of Accruals
  10. Earnings Quality: Measuring The Discretionary Portion Of Accruals
  11. Earnings Quality: Conclusion
RELATED TERMS
  1. Short-Term Debt

    An account shown in the current liabilities portion of a company's ...
  2. Audit

    An unbiased examination and evaluation of the financial statements ...
  3. IRR Rule

    A measure for evaluating whether to proceed with a project or ...
  4. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and ...
  5. Discounted Payback Period

    A capital budgeting procedure used to determine the profitability ...
  6. Contribution Margin

    A cost accounting concept that allows a company to determine ...
RELATED FAQS
  1. When does a growth stock turn into a value opportunity?

    A growth stock turns into a value opportunity when it trades at a reasonable multiple of the company's earnings per share ... Read Full Answer >>
  2. What is finance?

    "Finance" is a broad term that describes two related activities: the study of how money is managed and the actual process ... Read Full Answer >>
  3. What items are considered liquid assets?

    A liquid asset is cash on hand or an asset that can be readily converted to cash. An asset that can readily be converted ... Read Full Answer >>
  4. What is the 'Rule of 72'?

    The 'Rule of 72' is a simplified way to determine how long an investment will take to double, given a fixed annual rate of ... Read Full Answer >>
  5. What is the formula for calculating EBITDA?

    When analyzing financial fitness, corporate accountants and investors alike closely examine a company's financial statements ... Read Full Answer >>
  6. How do I calculate the P/E ratio of a company?

    The price-earnings ratio (P/E ratio) is a valuation measure that compares the level of stock prices to the level of corporate ... Read Full Answer >>
Hot Definitions
  1. Harry Potter Stock Index

    A collection of stocks from companies related to the "Harry Potter" series franchise. Created by StockPickr, this index seeks ...
  2. Liquidation Margin

    Liquidation margin refers to the value of all of the equity positions in a margin account. If an investor or trader holds ...
  3. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  4. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  5. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
Trading Center