Fin361 Appendix 3a
A Guide to Earnings and Financial Reporting Quality
A Guide to Earnings and Financial Reporting Quality
Quality of reported financial information is a critical element in evaluating financial statement data. The higher the quality of financial reporting, the more useful the information is for business decision making.
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A Guide to Earnings and Financial Reporting Quality
There are a number of areas on the earnings statement that provide management with opportunities for influencing the outcome of reported earnings.
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1
A Guide to Earnings and Financial Reporting Quality
These areas include • accounting choices, estimates, and judgments • changes in accounting methods and assumptions • discretionary expenditures • nonrecurring transactions • nonoperating gains and losses • revenue and expense recognitions that do not match cash flow
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A Guide to Earnings and Financial Reporting Quality
The financial statement analyst should • consider the qualitative as well as the quantitative components of earnings for an accounting period • develop an earnings figure that reflects the future ongoing potential of the firm
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A Guide to Earnings and Financial Reporting Quality
In addition to earnings quality, the quality of information on the balance sheet and statement of cash flows is equally important. Because these financial statements are interrelated, quality of financial reporting issues often affects more than one financial statement.
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A Checklist for Earnings Quality
I. II. III. IV. V. Sales Cost of Goods Sold Operating Expenses Nonoperating Revenue and Expense Other Issues
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A Checklist for Earnings Quality Sales
Key areas that affect earnings quality 1. 2. 3. 4. 5. Premature revenue recognition Gross vs. net basis Allowance for doubtful accounts Price vs. volume changes Real vs. nominal growth
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Sales Premature revenue recognition
Revenue should not be recognized until there is evidence that a true sale
A Guide to Earnings and Financial Reporting Quality
Quality of reported financial information is a critical element in evaluating financial statement data. The higher the quality of financial reporting, the more useful the information is for business decision making.
5-2
A Guide to Earnings and Financial Reporting Quality
There are a number of areas on the earnings statement that provide management with opportunities for influencing the outcome of reported earnings.
5-3
1
A Guide to Earnings and Financial Reporting Quality
These areas include • accounting choices, estimates, and judgments • changes in accounting methods and assumptions • discretionary expenditures • nonrecurring transactions • nonoperating gains and losses • revenue and expense recognitions that do not match cash flow
5-4
A Guide to Earnings and Financial Reporting Quality
The financial statement analyst should • consider the qualitative as well as the quantitative components of earnings for an accounting period • develop an earnings figure that reflects the future ongoing potential of the firm
5-5
A Guide to Earnings and Financial Reporting Quality
In addition to earnings quality, the quality of information on the balance sheet and statement of cash flows is equally important. Because these financial statements are interrelated, quality of financial reporting issues often affects more than one financial statement.
5-6
2
A Checklist for Earnings Quality
I. II. III. IV. V. Sales Cost of Goods Sold Operating Expenses Nonoperating Revenue and Expense Other Issues
5-7
A Checklist for Earnings Quality Sales
Key areas that affect earnings quality 1. 2. 3. 4. 5. Premature revenue recognition Gross vs. net basis Allowance for doubtful accounts Price vs. volume changes Real vs. nominal growth
5-8
Sales Premature revenue recognition
Revenue should not be recognized until there is evidence that a true sale