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CFA Level I · CFA Level I Exam · Financial Reporting Quality

Under the CFA Institute financial reporting quality framework, which statement best describes a company whose reports are of high financial reporting quality but low earnings quality?

A company with high reporting quality but low earnings quality follows the accounting standards and presents decision-useful information, yet the earnings it faithfully reports are not sustainable or do not exceed its cost of capital. Reporting quality is about faithful presentation; earnings quality is about the results themselves.

  1. AIts reports follow GAAP and are decision-useful, but the reported earnings are not sustainable.Correct
  2. BIts reports contain misleading estimates, but its earnings are highly sustainable.
  3. CIts reports omit key disclosures, but its earnings exceed its cost of capital.

Explanation

High financial reporting quality means the reports comply with the standards and are decision-useful. Earnings quality concerns whether earnings are sustainable and adequate. A firm can report faithfully that it has poor or one-off earnings, so high reporting quality can coexist with low earnings quality. The other options describe low reporting quality.

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