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Melissa, how can an investor find out the “quality of earnings” for a company?

 

Melissa, how can an investor find out the “quality of earnings” for a company?

 

One of our objectives for this week is the concept of ‘quality of earnings’. This is the concept that earnings can be artificially manipulated, sometimes overstated, by inflated inventory prices or other anomalies that may appear on a statement. Kimmel, Weygandt, and Kieso (2009) say that quality of earnings indicates the level of full and transparent information provided to users of the financial statements.

 

Also, what are some other factors that can affect the quality of earnings?

Suzanne

 

Daniel,  can  horizontal and vertical analysis be used for the comparison of multiple companies?

 

There are three comparisons that we read about- Intracompany, Intercompany and Industry Average comparisons.

 

With an Intracompany comparison, managers can compare current and prior periods or different divisions.   Often this type of comparison is used in the management discussion and analysis portion of the financial statements.

 

At the CPA firm, we computed all of the ratios annually for a multi-million dollar abattoir.  They were provided to management to identified areas of opportunity, and often as a comparison, as a large change would need to be explained.  We provided a 5 year comparison of all of the results and an explanation of each ratio to management.

 

All, what are Intercompany and Industry Average comparisons? How are they useful?

Suzanne

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