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In measuring earnings quality, which of the following statements is most appropriate?

A) The higher the accruals ratio, the higher the earnings quality.

B) Accruals can be measured as the change in net operating assets (NOA) over a period of time.

C) Accruals can be measured as net income less cash flows from operations (CFO) less cash flows from financing (CFF).

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Using the balance sheet, we can measure accruals as the change in net operating assets (NOA) over a period of time. NOA is the difference in operating assets and operating liabilities. Operating assets are equal to total assets minus cash, equivalents to cash, and marketable securities. Operating liabilities are equal to total liabilities minus total debt (both short-term and long-term). In summary, the formula for balance sheet based aggregate accruals is:

AccrualsBS = NOAEND − NOABEG

We can also derive the aggregate accruals by subtracting cash flow from operating activities (CFO) and cash flow from investing activities (CFI) from reported earnings as follows:

AccrualsCF = NI − CFO − CFI

The lower the accruals ratio, the higher the earnings quality.