CFA Practice Question

There are 89 practice questions for this study session.

CFA Practice Question

The lack of persistence of the accrual component of earnings is caused by:
A. earnings management.
B. estimation errors.
C. either estimation errors or earnings management, or both.
Explanation: It does not necessarily have to be caused by earnings management. It can also be caused by errors in estimating the accruals. Accruals require assumptions and estimates of future cash flows. For example, recording a receivable accelerates the recognition of a future cash flow in earnings, and matches the timing of the accounting recognition with the timing of the economic benefits from the sale. If the net proceeds from the receivable are less than the original estimate, then the subsequent entry records both the cash collected and the correction of the estimation error.

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