Charlie Harper wants invest in the stock market but knows very little about accounting and financial reporting practices. Recently, he read an article in The Wall Street Journal that focused on the subject of ‘‘earnings quality.’’ After reading the article, Charlie was baffled and asked one of his friends, ‘‘how can there be a difference in the quality of earnings across companies? Corporate earnings are hard, cold facts, right? Accountants just add numbers here and subtract numbers there to arrive at a company’s net income, right? Any way you cut it, two plus two equals four rights?’’
Write a memo to Charlie that explains the concept of earnings quality and discusses several factors that influence earnings quality. Because Charlie is unfamiliar with accounting and financial reporting practices, include numerical examples in the memo to clarify how these factors influence earnings quality. Conclude your memo with a few suggestions to Charlie regarding how he can evaluate the quality of reported earnings data.

  • CreatedMarch 27, 2015
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