Description

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.

  1. Why is the determination of earnings quality and persistence important?
  2. Explain recasting of the income statement, and give three examples of items that are recasted.
  3. 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

Posted 1

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.

Posted 2

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.

Posted 3

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.