US CMA Part 2 · Chapter 2 · Question 11 of 15
Which of the following is the strongest indicator of LOW earnings quality?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) Net income has grown steadily for three years while cash flow from operating activities has declined each year
Explanation
High-quality earnings are sustainable and backed by cash. When reported income rises while operating cash flow falls, earnings are increasingly driven by accruals (such as growing receivables or capitalized costs), which may reverse and can signal aggressive accounting. Operating cash flow exceeding net income, conservative policies and cash-backed revenue growth all indicate higher earnings quality.
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