Question

This Question: 10 pts 43 of 44 (35 complete An important component of earnings quality is the conservative recognition of net revenues. True O False

Answer 1

The correct answer for the question is TRUE.

Earnings quality is the the degree to which a firm's reported earnings precisely and accurately reflect the income from that period. Generally, companies who have conservative revenue recognition practices are said to be having a High Quality earnings ratio. By following a conservation method of recognition of Net revenues, the companies carefully report their earnings by taking a conservative approach. Conservative approach is the approach under which a company follows a set of stringent guidelines and protocols in order to report its earnings. The revenue should be earned by the company and the company should have a legal claim to such earnings that are reported.

Generaly in such companies, the liabilities that are uncertain, are recorded in the books of accounts as soon as it is uncovered while the revenues can be recognized only when they are earned. Accounting conservatism minimizes the scope of bias and facilitates a strong goodwill among the users of such financial statements when such practices are followed.

As such, when a company follows such principles of conservatism, it is directly related to improving the Earnings quality of a corporation/company.

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