Cabo Corporation reported net income of $346,000, cash of $67,800, and net cash provided by operating...
Cabo Corporation reported net income of $346,000, cash of $67,800, and net cash provided by operating activities of $221,200. What does this suggest about the quality of the company’s earnings? Calculate the quality of earnings ratio. What further steps should be taken?
Homework Answers
The quality of earnings ratio = Net cash provided by operating activities / Net Income
= $221200 / $346000
= 0.639
The quality of earnings ratio of Cabo Corporation ( calculated above) is less than 1 indicates that Net income is greater than the operating cash flow of the business.
Suggestion is that the business might be using accounting techniques to accelerate the recognition of income.
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