Question #41
Reading: Reading 12 Evaluating Quality of Financial Reports
PDF File: Reading 12 Evaluating Quality of Financial Reports.pdf
Page: 37
Status: Incorrect
Correct Answer: A
Your Answer: B
Question
Sustainable earnings are most likely to be driven by:
Answer Choices:
A. Cash flow element of earnings
B. Conservative revenue recognition practices
C. Accruals element of earnings
Explanation
Sustainable and persistent earnings are driven by cash flow element of earnings. The
stability and accuracy of earnings forecasts can be reduced by estimation process that
generates the accruals component of earnings. Conservative and aggressive revenue
recognition practices both would result in reversion in earnings (and hence lowers the
sustainability of earnings).