| Sample case | Reasoning | Earnings Quality |
| Discretionary expenses | - Discretionary expense items are declining as the:
- Investment in capital assets ↑ (∵CFIt > depreciationt)
- Sales ↑
| Doubt about manipulation. | Low |
| Depreciation method | - Changed from the double-declining balance method to the straight-line method.
- This is aimed at being more comparable with the accounting practices of other firms within the industry.
- The change was not retroactively applied and only affects assets that were acquired on or after a certain specified date.
| - Measuring earnings quality based on conservative earnings (with double-declining balance method) is inferior measure as most accruals will correct over time.
|
Higher under the straight-line method than the double-declining method.
|
| Inventory/COGS | - LIFO
- Under stable or rising prices.
| - It would cause net earnings to reflect economic (real) earnings.
| Higher |
| Lease | | - A finance lease is reported on the B/S as an asset and as a liability.
- In the I/S, the leased asset is depreciated and interest expense is recognized on the liability.
| Higher (than operating lease). |
| Receivable sale | - Receivable sale with recourse
| - CFO ↑
- However, the receivable sale is a collateralized borrowing arrangement that remains off-balance-sheet.
| Lower |
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