Question #20
Reading: Reading 12 Evaluating Quality of Financial Reports
PDF File: Reading 12 Evaluating Quality of Financial Reports.pdf
Page: 15
Status: Correct
Correct Answer: B
Question
Andre Bursh, is analyzing large retailers and has collected the following information on three companies based on the most recent financial statements: Allied Stores Beta Mart Cash-N-Carry Total Earnings (per share) $2.80 $1.33 $0.75 Cash element $1.90 $0.78 $0.25 Accrual element $0.90 $0.55 $0.50 Bursh notes that all three companies have reported stellar earnings this past year. Bursh is concerned about sustainability of such high earnings. Which company's earnings will revert to its mean fastest?
Answer Choices:
A. Allied Stores
B. Cash-N-Carry
C. Beta Mart
Explanation
Cash-N-Carry's earnings is comprised of large proportion of accruals (0.50/0.75 or 67%).
Allied's accruals comprise (0.90/2.80) 32% of earnings and Beta's accruals comprise 41% of
earnings.