Evaluating Quality of Financial Reports

Free CFA Level II lesson in Financial Statement Analysis. 12 min read, ~1,736 words.

Earnings quality = how faithfully reported income reflects economic reality; high quality is sustainable and cash-backed. The NI vs. CFO relationship is the primary diagnostic; a persistent CFO/NI below 1.0 signals accrual-heavy earnings. Accruals ratio = (NI - CFO) / Avg NOA. A rising trend signals deteriorating persistence. NOA excludes...