Which of the following statements about the quality of earnings ratio is true?
A) Failure to accrue appropriate expenses will inflate net earnings and increase the quality of earnings ratio.
B) When sales are growing, receivables and inventory normally increase faster than trade payables so the ratio increases.
C) Failure to accrue appropriate expenses will inflate net earnings and reduce the quality of earnings ratio.
D) Seasonal variations in sales have no impact on the quality of earnings ratio.

Question

Quizplus · Accepted Answer

The quality of earnings ratio measures the percentage of earnings that come from core operating activities, rather than one-time gains or accounting adjustments. Accruing appropriate expenses is important for accurately reflecting core operating activities, so failure to do so will reduce the quality of earnings ratio. Additionally, receivables and inventory increasing faster than trade payables will decrease the quality of earnings ratio, as it indicates that earnings are being driven by non-operating activities such as stockpiling inventory or delaying payments to suppliers. Seasonal variations in sales can impact the quality of earnings ratio if they result in irregularities in accounting practices.

Which of the Following Statements About the Quality of Earnings