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Chapter 5: Casa 5-2: Earnings Quality Economic income is considered to be a better predictor of future cash flows than accounting income is. A technique used by securities analysts to determine the degree of correlation beteresa a firm's accounting earnings and its true economic income is quality of earnings assessment. Required Discuss measures that may be used to assess the quality of a firm's reported earnings Investors and analysts must evaluate a company's stated earnings in order to comprehend the accuracy of financial data. The quality of a company's earnings is determined by comparing its accounting earnings with its real economic income. Here are some ways to assess the quality of a company's reported earnings, also known as quality of comings (QoE): Financial ratios, use ratios like the cash conversion ratio, accruals ratio, or quality off earnings ratio to compare different aspects of a company's finances. For example, the crabs conversion ratio compares cash flow to camrings, while the quality of earnings ratio compares net income to cash from operations. Income statement, compare the most recent income statement to previous quarterly and annual statements. Look for trends like increasing costs that aren't matched by growing revenues. Balance sheet, look for changes in reserves that are higher them corm:', which could indicate how long the company could withstand financial difficulties. Other financial statements track activity from the income statement through to the balance sheet and cash flow statement. Company information, understand the company's business and industry, and evaluate its accounting policies. You can also review management compensation and insider transactions and look for risk disclosures. Earnings per share (EPS] indicator contrasts the business's net income with the total number of outstanding shares. A greater EPS shows that the business is making more money por share of stock. Return on equity (ROE) gauges a business's success in relation to the amount of equity armed by shareholders. A higher ROE shows that the business is making more money for every dollar invested by shareholders