Question

A Wall Street Journal article noted that Apple reported higher income than its competitors by using a more aggressive policy for recognizing revenue on future upgrades to its products. Some contend that Apple’s quality of earnings is low. What does the term “quality of earnings” mean?

Short answer

Quality of earnings means the reporting of credibility of the earnings in number.

Step-by-step solution

Meaning of Earnings

Income is the principal determinant shown in a company’s financial statements to represent the company’s profitability for a specific period. In addition, a company’s earnings help calculate several financial ratios.

Explanation of quality of earnings

Quality of earnings means the number reported in the financial statements must be reliable and accurately presented. Companies using aggressive policies will report higher income numbers for the short run. In this case, the quality of earnings will be less.