Question #56
Reading: Reading 12 Evaluating Quality of Financial Reports
PDF File: Reading 12 Evaluating Quality of Financial Reports.pdf
Page: 49
Status: Correct
Correct Answer: B
Question
Complete the following sentence. When earnings are relatively free of accruals, mean reversion will occur __________.
Answer Choices:
A. at the same rate as usual
B. relatively faster than usual
C. relatively slower than usual
Explanation
Earnings consist of cash flow and accruals and there is an inverse relationship between
accruals and cash flow. When earnings are relatively free of accruals, mean reversion will
occur at a slower rate. The opposite is true when earnings are largely comprised of
accruals.