Which of the following statements about the quality of income ratio is correct?
A)When sales are growing,receivables and inventory normally increase faster than accounts 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 net income and reduce the quality of income ratio.
D)The quality of income ratio is computed by dividing net income by cash flow from operating activities.

Question

Quizplus · Accepted Answer

The quality of income ratio reflects the extent to which a company's reported net income is derived from cash inflows generated from operating activities. Failure to accrue appropriate expenses (e.g. not accruing for sales returns) will artificially inflate net income and reduce the quality of income ratio. Additionally, the quality of income ratio is not computed by dividing net income by cash flow from operating activities (choice D).

Which of the Following Statements About the Quality of Income