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LogoutDiscarding any abnormalities, accounting gimmicks, or one-time occurrences that may affect the true bottom-line figures on performance reveals a company’s profits quality. When these are removed, the earnings resulting from greater sales or cheaper expenses are readily visible.
Even variables outside the company can influence an assessment of profit quality. For example, many or most firms perceive the quality of their earnings to be bad during periods of significant inflation. Their sales statistics are also exaggerated.
In general, conservatively estimated earnings are thought to be more trustworthy than those generated using aggressive accounting methods. Accounting methods that disguise weak sales or increased business risk can degrade the quality of results.