Assessment of the Quality of Earning Is Useful to Accounting and Is Applicable in Controlling the Earnings of a Firm - Essay Example

The paper “Assessment of the Quality of Earning Is Useful to Accounting and Is Applicable in Controlling the Earnings of a Firm" is a  brilliant example of an essay on finance & accounting. Quality of earning comes in at the point where an organization that applies conservative accounting realizes a relative change in the manner in which they invest in assets that are used in the investments. An organization may experience a change in earning due to various external or internal reasons. These reasons may involve the change in sales by an increase, or even a relative decrease in the production cost. This may result in high quality earning. However, when the contributors to the change of earnings are external factors, then this is termed to be a low quality of earning.

“The term quality analysis includes the analysis of all financial statements” (Pinto et al 13). The main use of quality of earning includes meeting the analyst’s expectations. An organization’s financial analysts require the use of this technique in order to realize their objective. This involves the process of prediction of trends in the financial performance of the firm and earnings from the organization. In most cases, the process of trying to meet the revenue expectation may be the preferred target for the management to realize the revenue recognition processes that may be fraudulent. The attempts of the analysts to find out the short term earning with reference to the achievements of the long term strategies may also embrace the quality of earnings.

The other use of quality of earning measurement involves avoiding debt –agreement violations and reducing political cost. The aims of some organizations may include avoiding the violation of earning based debt agreement where the lender may decide to increase the interest rates and call for the repayment immediately.  Some firms may be seen to be too profitable thereby suffer political costs; this calls for the measuring of the quality of earning.

In order to meet the bonus plan requirements, an organization may need to carry out quality earning measurements. The best way of managing earnings is in such a way that the executive’s earning the based bonus is maximized. This involves the management of the earnings so that it is maintained above the minimum at all times. Any extra bonus earnings are kept and preserved for the next period. In the process of changing management, a firm needs to carry out earning management too. As a result, the quality of earning takes part as an important factor in the management transition process.

For accounting, just calculations alone can’t tell an organization or a firm’s net earnings. It requires analysis and subjective inputs by accountants in order to determine thus, the need for quality earning a determination. In so doing, there must be a consideration of the micro and the macro business environment from which the business operates (Powers et al 622). The accounting situation does not give the complete accuracy of this evaluation, and determining any manipulations in the financial statements; instead, an analysis of the quality of earnings becomes more confirmatory in accounting situations.

From the above discussion, it is made clear that the assessment of the quality of earning is useful to accounting and is applicable in controlling the earnings of a firm.  Some of the uses include assisting the analyst in coming up with realistic pictures of what the company’s earnings are like. The other factor that it applies includes the political view of the assumed profits and handling of debts in an efficient manner. As such, maintaining the quality of earnings requires the analysis of external and internal environments thereby maintaining the required standards of earnings.