Question #31
Reading: Reading 12 Evaluating Quality of Financial Reports
PDF File: Reading 12 Evaluating Quality of Financial Reports.pdf
Page: 24
Status: Incorrect
Correct Answer: A
Your Answer: B
Question
Complete the following sentence. The cash component of income is ___________ than the accrual component.
Answer Choices:
A. more persistent
B. less persistent
C. the same persistence
Explanation
The accrual component of income (accruals) is less persistent than the cash component.
By persistent we mean the income is sustainable; that is, a dollar of earnings today implies
a dollar of earnings in future periods. Lower persistency is partially due to the estimates
involved with accrual accounting.