Which of the Following Statements About the Quality of Earnings

question 7

Multiple Choice

Which of the following statements about the quality of earnings ratio is false?

• A)An increase in operating assets and a decrease in liabilities will reduce operating cash flows,thereby reducing the ratio.
• B)Seasonal variations in sales and purchases of inventory can cause wide deviations in the quality of earnings ratio.
• C)When sales are growing,receivables and inventory normally increase at a faster rate than trade payables often causing operating cash flows to be less than profit.
• D)Seasonal variations in sales have no impact on the quality of earnings ratio.

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Definitions:

Nominal Rate

The stated interest rate on a loan or investment, not accounting for compounding or inflation effects.

Present Value

The actual value of future money amounts or incoming cash flows, calculated using an established return rate.

Interest Payable

This refers to the amount of interest expense that has accrued but has not yet been paid by the company.

Periodic Bond Interest Payments

The regular interest payments made to bondholders during the life of the bond.