CASE STUDY 2

Economic income is considered to be a better predictor of future cash flows than accounting income is. A technique used by securities analysts to determine the degree of correlation between a firm’s accounting earnings and its true economic income is the quality of earnings assessment.

Required:

Discuss all measures that are used to assess the quality of a firm’s reported earnings (Chapter 5).

Obtain an annual report for a large corporation and perform an assessment on earnings quality using all the measures available.