Session 17 Ashish Pandey Earnings Quality Earnings Quality
- Slides: 11
Session 17 Ashish Pandey
Earnings Quality
Earnings Quality • Earnings quality refers to the ability of reported earnings to predict a company’s future. The relevance of any historicalbased financial statement hinges on its predictive value.
For earnings to be of high quality it should possess the following features 1. Derived from core business operations 2. Recognised, measured and presented accordance with GAAPs 3. Principal qualitative characteristics adhered to 4. Accounting policies consistently followed 5. Close to reality i. e. neither overstated nor understated 6. High chances of continuation and sustenance of the past earnings And thus a fair prediction of future profitability and cash flows possible
Earnings Management
Earnings management • Earnings management is the use of accounting techniques to produce financial reports that may paint an overly positive picture of a company's business activities and financial position.
They may either • Increase income, increase assets, decrease liabilities – Raise estimated life of an asset – Lower the prov for DD – Recognise rev for goods sent but not sold – Shift from wac to fifo incase of inflation • Decrease income, decrease assets, increase liabilities
ANNUAL REPORT
Annual Report • An annual report is a comprehensive report on a company's activities throughout the preceding year. Annual reports are intended to give shareholders and other interested people information about the company's activities and financial performance.
Constituents of an annual report • • • Chairman’s letter Financial Highlights Letter to the Shareholders Narrative Text, Graphics and Photos Management's Discussion and Analysis Financial Statements Notes to Financial Statements Auditor's Report Directors report Corporate Governance report Summary Financial Data Corporate Information
Management Discussion and analysis 1. Discusses different aspects of the business. – – new hires or appointments, new product introductions, updates on the progress of business acquisitions, other information management believes to be important to investors. 2. overview of the previous year's developments and how the company performed over that period. 3. good starting point for a new investor who wants to understand a business' fundamentals.
