CFA Level I · CFA Level I Exam · Financial Reporting Quality
Which description of earnings that are of high quality is most accurate?
High-quality earnings are sustainable, meaning they are likely to recur, and they generate a return above the company's cost of capital. Smoothness or the highest allowable figure does not show quality, since either may result from discretionary or aggressive reporting choices.
- AEarnings that rise smoothly each period
- BEarnings that are sustainable and exceed the cost of capitalCorrect
- CEarnings that are the highest the standards allow
Explanation
High-quality earnings are sustainable and provide a return in excess of the company's cost of capital. Smooth earnings can signal manipulation, and the highest permitted figure reflects aggressive choices, not quality.
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