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Earnings Quality and Earnings Management. Edition No. 1
VDM Publishing House, Nov 2008, Pages: 216
The primary product of financial reporting is net
income or earnings as a measure of performance.
Earnings are the summary measure of firm performance
produced under the accrual basis of accounting.
Earnings are important since they are used as a
summary measure of firm performance by a wide range
of users, for instance for executive compensation
plans or in debt covenants.
Accruals are at the heart of Financial Reporting.
The primary role of accruals is to overcome problems
with measuring firm performance when firms are in
continuous operation. Accruals shift or adjust the
recognition of cash flows over time, so that the
adjusted number, i.e. earnings, better measures firm
performance. However, accruals can also be used to
manage earnings. As a result, accruals play a major
role in the determination of the quality of reported
earnings. This study provides an overview of the
role of accruals in financial reporting. In the
empirical analysis, the manner in which accruals
adjust cash flows is examined for respectively the
prediction of future cash flows, growth and losses
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