Earning quality earnings report is a routine in the due diligence process for private acquisitions. Net profit sometimes is not automatically a 100% accurate sign of financial performance for an entity. This report assesses how a company accumulates its revenues such as cash or non-cash activities, recurring or nonrecurring activities.

a. Discuss the areas related to earnings statements that provide management with opportunities for influencing the outcome of reported earnings in ways that may not best represent economic reality or the future operating potential of a firm.

1. 2. What items should be assessed when analysing the quality of the sales number on an earnings statement?
2. 3. How can the quality of earnings be impacted by discretionary expenses? Discuss with the support of relevant examples.