Question

A high quality of earnings is indicated by:

(A) Declaration of both cash and stock dividends
(B) A history of increasing earnings and conservative accounting methods
(C) Earnings derived largely from newly introduced products
(D) Use of FIFO method of inventory during sustained inflation.

Answer 1

Answer:

(B) A history of increasing earnings and conservative accounting methods.

Explanation:

Quality of earnings refers to income that is earned from core operating activity of the business. So if a company declares profit that is as a result of improved processes it is high quality.

So a history of increased earnings as a result of conservative accounting is a high quality earning.

High quality earnings tend to be sustainable by identifying and improving in the operational process that drives the income.