Earnings quality
Response to the following problem:
The financial community in the United States has become increasingly concerned with the quality of reported company earnings.
Required:
1. Define the term earnings quality.
2. Explain the distinction between permanent and transitory earnings as it relates to the concept of earnings quality.
3. How do earnings management practices affect the quality of earnings?
4. Assume that a manufacturing company's annual income statement included a large gain from the sale of investment securities. What factors would you consider in determining whether or not this gain should be included in an assessment of the company's permanent earnings?