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Chapter 4: Question 9 (page 179)

A Wall Street Journal article noted that Apple reported higher income than its competitors by using a more aggressive policy for recognizing revenue on future upgrades to its products. Some contend that Apple鈥檚 quality of earnings is low. What does the term 鈥渜uality of earnings鈥� mean?

Short Answer

Expert verified

Quality of earnings means the reporting of credibility of the earnings in number.

Step by step solution

01

Meaning of Earnings

Income is the principal determinant shown in a company鈥檚 financial statements to represent the company鈥檚 profitability for a specific period. In addition, a company鈥檚 earnings help calculate several financial ratios.

02

Explanation of quality of earnings

Quality of earnings means the number reported in the financial statements must be reliable and accurately presented. Companies using aggressive policies will report higher income numbers for the short run. In this case, the quality of earnings will be less.

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Most popular questions from this chapter

Question: What is meant by the terms elements and items as they relate to the income statement? Why might items have to be disclosed in the income statement?

Finley Corporation had income from continuing operations of \(10,600,000 in 2017. During 2017, it disposed of its restaurant division at an after-tax loss of \)189,000. Prior to disposal, the division operated at a loss of $315,000 (net of tax) in 2017 (assume that the disposal of the restaurant division meets the criteria for recognition as a discontinued operation). Finley had 10,000,000 shares of common stock outstanding during 2017. Prepare a partial income statement for Finley beginning with income from continuing operations.

What is earnings management?

(Income Statement, EPS) Presented below are selected ledger accounts of Tucker Corporation as of December 31, 2017.

Cash $50,000

Administrative expenses 100,000

Selling expenses 80,000

Net sales 540,000

Cost of goods sold 210,000

Cash dividends declared (2017) 20,000

Cash dividends paid (2017) 15,000

Discontinued operations (loss before income taxes) 40,000

Depreciation expense, not recorded in 2016 30,000

Retained earnings, December 31, 2016 90,000

Effective tax rate 30%

Instructions

  1. Compute net income for 2017.
  2. Prepare a partial income statement beginning with income from continuing operations before income tax, and including appropriate earnings per share information. Assume 10,000 shares of common stock were outstanding during 2017.

Using the information from BE4-9, prepare a retained earnings statement for the year ended December 31, 2017. Assume an error was discovered: land costing $80,000 (net of tax) was charged to maintenance and repairs expense in 2014.

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