Session 7: Financial Reporting and Analysis: Earnings Quality Issues and Financial Ratio Analysis Reading 25: Evaluating Financial Reporting Quality
LOS c: Discuss the opportunities and motivations for management to intervene in the external financial reporting process and the mechanisms that discipline such intervention.
Which of the follow characteristics is the least compelling evidence that a company has a conservative financial-reporting strategy?
A) |
Fixed assets are carried at book value. | |
B) |
The LIFO method is used. | |
C) |
Earnings growth has been steady and dependable over the last few years. | |
Steady earnings growth can be a sign of manipulation of the numbers. It is not a sure sign, but of the choices, the earnings growth is the only one that presents a yellow flag with regards to earnings quality. The LIFO method is considered more conservative for the income statement than FIFO; FIFO is preferred on the balance sheet statement – neither is exclusively more conservative. Most fixed assets are carried at book value – that fact alone says nothing about a company’s financial reporting. |