Case 5-2 Earnings Quality Economic income is considered to be a better predictor of future cash flows than accounting income is

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Case 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 between a firm's accounting earnings and its true economic income is quality of earnings assessment.

Required:

a)Discuss measures that may be used to assess the quality of a firm's reported earnings.

b)Obtain an annual report for a large corporation and perform a quality of earnings assessment.

 

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