Question

Benson Corporation and Stabler Company are two firms in the same industry. These two firms have approximately the same annual revenues and total assets. Following is the most recent income statement of each firm. Benson Corporation uses the LIFO inventory costing method and an accelerated depreciation method, whereas Stabler Company uses FIFO inventory costing and the straight-line depreciation method.
Required:
(a) Define earnings quality.
(b) Why is earnings quality an important consideration for financial decision makers when evaluating financial statement data?
(c) Suppose that a friend of yours is considering investing in the common stock of either Benson Corporation or Stabler Company. Write a memo to your friend explaining the concept of earnings quality and comment on how the quality of these firms’ reported earnings might be affected by their use of different accounting methods.


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  • CreatedMarch 27, 2015
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