Finance professionals often evaluate the quality of earnings by looking at the difference between earnings and cash flows. In particular, financial analysts often compute the difference between (i) net income from the income statement and (ii) cash flow' from operations from the cash flow statement; die bigger is this difference, the lower is the level of earnings quality.
Required:
a. What is the meaning of “quality of earnings”?
b. Evaluate the practice of assessing earnings quality by comparing earnings and cash flows.