When looking to the statement of financial position for an assessment of earnings quality, stakeholders should pay particular attention to
A)a proportionately high cash balance, as this signifies high-quality earnings.
B)how the company is financed and what the revenue-generating assets are.
C)a proportionately low liability balance, as this signifies high-quality earnings.
D)silly question.The statement of financial position is not a reflection of earnings quality.

Question

Quizplus · Accepted Answer

The statement of financial position provides information on how the company is financed (through liabilities and equity) and what the revenue-generating assets are. This information is relevant for assessing the quality of earnings, as companies with sustainable revenue streams and well-managed debt levels are more likely to have high-quality earnings. A high cash balance (option A) and low liability balance (option C) may not necessarily indicate high-quality earnings, as there may be reasons for these imbalances (e.g. hoarding cash due to lack of investment opportunities or delaying payments to creditors). Option D is incorrect, as the statement of financial position does provide information that can be useful in assessing earnings quality.

When Looking to the Statement of Financial Position for an Assessment