7Q - Intermediate Accounting (Kieso)

Question

How can earnings management affect the quality of earnings?

Step-by-Step Solution

Answer

The quality of earnings is negatively affected by earnings management. Earnings management lowers the reliability element of income.

Step 1: Meaning of Earnings Management

Earnings management is used by companies that represent the overall positive view of the company's activities and financial statements. 

Step 2: Earnings management affecting the quality of earnings

If misleading information is provided, it will negatively hamper the quality of earnings. Earnings management reduces the reliability of income as it reports biased income. Information in the financial statements must be relevant and faithfully represented to ensure the confidence of investors and other interested parties.