mamuka12

I agree with you 100% dreary on manipulation but this scares me as a backwards way of testing the accruals ratio that would result in a higher earnings quality.
Its definitely an area that can be manipulated by management.
Lets walk through it:
1) If management doesn’t recognize enough deferred revenue, then earning quality high but NI is understated
2) If management is aggressive in recognizing deferred revenue, then earnings quality is low but NI is overstated
That leads me to believe that even though management can manipulate earnings with deferred revenues, the quality of earnings are affected correctly so I am leaning towards deferred revenues increase quality of earnings. However, it does open the door to manipulation so its important to compare both earnings quality and NI.