Equity Analysis and Valuation.
I don’t know how to handle this Accounting question and need guidance.
Earnings are extremely important to a publicly traded company and the creditors and investors of that company. However, looking at earnings without regard to the quality of those earnings is hazardous to the health of creditors and investors.
- Why is the determination of earnings quality and persistence important?
- Explain recasting of the income statement, and give three examples of items that are recasted.
- Explain adjusting of the income statement, and give three examples of items that are recasted.
Just do response each posted # 1 to 3 down below only
Good morning class,
Why is the determination of earnings quality and persistence important?
The reason earnings quality and persistence are important are because an analyst must determine to what extent a company’s performance is real or doctored. High quality and persistent earnings bode well for a company’s performance.
Explain recasting of the income statement, and give three examples of items that are recasted.
Recasting the income statement is the rearranging income items into categories that better reflect the reliability and consistency of earnings, such as earnings from continuing operations, gains and losses, and non-recurring expenses. This rearrangement gives the analyst a better understanding of earnings quality.
Explain adjusting of the income statement, and give three examples of items that are recasted.
Adjustments to the income statement are used to assign earnings components to periods that more accurately reflect the business’ economic reality. Examples include contingencies, prepaid expenses, and changes due to different accounting policies.
Anne Harris posted Mar 6, 2020 10:24 PM
Earnings quality refers to the ability to predict a company’s future earnings using current reported income. Earnings persistence refers to the stability, predictability, variability, and trend in earnings. It is important for companies to analyze earnings quality and persistence in order to produce reliable forecasts of earnings power. Analysis also alerts management and investors to earnings management and income smoothing.
The process of recasting rearranges items on the income statement that are unrelated to ongoing business. Examples of items that are recasted include amounts from insurance claim proceeds and lawsuit settlements, one-time or non-recurring expenses, and one-time gains or losses from the disposition of assets. The process of adjusting assigns earning components on the income statement to periods where they most properly belong. Examples of items that are adjusted include damaged or slow-moving inventory, accrued and prepaid expenses, and bad debts and allowances for receivables.
Earning quality can be described as the amount a business earns with higher sales and low cost. This money is not shown by using accounting tools/tricks such as inflation, inventories, or depreciation. It is important to know a company’s true earnings. Persistence earnings are the recurring earnings from accounting to accounting period. These earnings continue to show up in income statement.
Recasting earnings can be find by showing the impact of discontinued business. For example, a business running multiple departments decided to close one department because of the low sales. The accounting and leadership will be able to show the positive numbers from other department that had higher sales. This gives a better look to the investors, creditors, and stock holders about company’s financial health. A business can recast sales revenue, expenses, and depreciation.
The adjusting process adjusts some components of business to other years to better reflect the period to which the income or expense belongs. Once adjustments are made, the analyst and leadership can make better comparisons between different periods which can help them develop trends. Three examples of items are that can be adjusted are legal settlements, effects of accounting method changes, and contingencies.