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Subject: Investment Analysis
Chapter/Topic: Financial Statement Analysis
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Concept Definition and Explanation
Analysts do talk of quality of a firm's earnings in the reports. A quality financial statement is good reflection of reality of the performance of business in a period. Sometimes companies use accounting tricks and accounting policy changes to make the firm's appearance stronger than it really is. Analysts find out such changes and bring them to the notice of the investors and comment that reported earnings are not quality earnings.
High-quality balance sheets typically have
Conservative use of debt
Assets with market value greater than book
No liabilities off the balance sheet
High-quality income statements reflect repeatable earnings
Gains from nonrecurring items are highlighted so that they can be be ignored when examining earnings
High-quality earnings result from the use of conservative accounting principles that do not overstate revenues or understate costs
References:
Reilly, Frank and Keith Brown, Investment Analysis and Portfolio Management, 7th Edition, Thomson-South Western, 2003
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Knols
Related Knols
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Books
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Research Papers
2001
Heidi Vander Bauwhede, "What Factors Influence Financial Statement Quality: A Framework and Some Empirical Evidence", http://venus.unive.it/bauhaus/Heidi%20Vander%20Bauwhede.PDF
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Concept Articles
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