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

Question

Quizplus · Accepted Answer

The quality of earnings ratio measures the proportion of earnings that are generated from operations rather than non-operating or artificial sources. Inflating profits through failure to accrue appropriate expenses will reduce the quality of earnings and, therefore, decrease the ratio. Option A is incorrect because an increase in receivables and inventory without a corresponding increase in trade payable would reduce the quality of earnings ratio. Option B is incorrect because seasonal variations can impact the timing and amount of revenue and expenses, which can affect the quality of earnings ratio. Option D is incorrect because inflating net profit through failure to accrue expenses would decrease the quality of earnings ratio.

Which of the Following Statements About the Quality of Earnings