Question #38
Reading: Reading 12 Evaluating Quality of Financial Reports
PDF File: Reading 12 Evaluating Quality of Financial Reports.pdf
Page: 32
Status: Incorrect
Correct Answer: B
Your Answer: C
Question
Classification shifting is least likely to result in a higher:
Answer Choices:
A. reported net income
B. equity value derived when earnings forecasts are based on operating earnings
C. firm value derived when cash flow forecasts are based on core earnings
Explanation
Classification shifting results in inflation of core or recurring earnings while keeping the
total reported income same. This is used to mislead analysts into using a higher number
as a basis for generating forecasts of future earnings and cash flows. Such erroneous
forecasts would then result in inflated equity and firm valuation.