CFA Practice Question

There are 89 practice questions for this study session.

CFA Practice Question

From their 2014 financial statements:

Which company is expected to experience the quickest mean reversion?
A. Company A
B. Company B
C. Company C
Explanation: Earnings that have a significant accrual component are less persistent and thus may revert to the mean more quickly.

User Contributed Comments 2

User Comment
shabi For two identical super growth firms - the one with large accruals is likely to slow down quicker to normal levels than the one with higher cash flow. I am not sure how this is so since most start ups have huge accruals for some time and their life cycle for growth is longer - is the quote referring to the likelihood of higher growth (for a longer time than the higher accrual firm) for an equal start up but with huge cash flow? If so, can someone please explain how this works?
myron given a similar financial fiscal period for two identical firms, the one with the higher accrual will have aggressively accounted for or captured higher revenues / lower expenses this period and therefore more stable revenues / expenses is likely in the future period (QUICKER mean reversion) - as opposed to higher cash flow which reflects less volatility in revenues / expenses this period and therefore similar revenues / expenses is likely in the future since cash is more difficult to manipulate (SLOWER mean reversion).
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