Problem Five: Balance Sheet Analysis of Earnings Quality
The relevance of reported asset values is linked (with few exceptions like cash, held-to-maturity investments and land) with their ultimate recognition as reported expenses. Provisions and liability values on the balance sheet may also affect earnings quality. For each of the following give an example and explain its impact upon cumulative earnings.
a. An overstated asset
b. An understated asset
c. An overstated liability or provision
d. An understated liability or provision

Question

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The Answer of Problem Five: Balance Sheet Analysis of Earnings Quality
The relevance of reported asset values is linked (with few exceptions like cash, held-to-maturity investments and land) with their ultimate recognition as reported expenses. Provisions and liability values on the balance sheet may also affect earnings quality. For each of the following give an example and explain its impact upon cumulative earnings.
a. An overstated asset
b. An understated asset
c. An overstated liability or provision
d. An understated liability or provision