Problem Five: Balance Sheet Analysis of Earnings Quality

question 17

Essay

Problem Five: Balance Sheet Analysis of Earnings Quality
The relevance of reported asset values is linked (with few exceptions like cash, held-to-maturity investments and land) with their ultimate recognition as reported expenses. Provisions and liability values on the balance sheet may also affect earnings quality. For each of the following give an example and explain its impact upon cumulative earnings.
a. An overstated asset
b. An understated asset
c. An overstated liability or provision
d. An understated liability or provision

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Definitions:

Deoxygenated Blood

Blood that has released its oxygen to the body's cells and is returning to the heart to be sent to the lungs for oxygenation.

Umbilical Artery

One of two arteries that carry deoxygenated blood from a fetus to the placenta in the umbilical cord.

Ductus Arteriosus

A fetal blood vessel that connects the pulmonary artery to the aorta, allowing blood to bypass the lungs in utero, which normally closes after birth.

Foramen Ovale

An opening in the septum between the two atria of the heart in the fetus, which normally closes after birth.