CFA Level I · CFA Level I Exam · Financial Reporting Quality
Which practice is most likely to reduce the quality of reported earnings by lowering their sustainability?
Recognizing a one-time gain from an asset sale within operating income most likely reduces earnings quality, because the gain will not recur and overstates sustainable operating performance. Required expensing and clear disclosure of estimates support, rather than weaken, quality.
- ARecognizing a one-time gain from an asset sale in operating incomeCorrect
- BExpensing research costs when incurred as required
- CDisclosing estimates and assumptions used for provisions
Explanation
Including a non-recurring gain in operating income inflates the apparent recurring earnings base. Required expensing and disclosure of estimates support transparency and quality.
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