Quality of Earning means stable increase in the earning by increasing the quantity of sale and decrease the cost of product. If we show the increase of sale by increasing prices without increasing the quantity of sale, it means, we have low quality of earning because our customers are decreasing day by day and what benefits for increasing selling prices when there will be no customer.
For getting high profit or showing it in the income statement, if we increase the selling prices of our inventory, it will just inflation in the value of inventory which will not work for the quality of earning in long run. When there will be big competition in the market, your inflation in the inventory may increase your sale value one or two years but next year your sales will decrease at the level which should be recorded in Guinness world records.
For example : Mr. R is so intelligent businessman. Every year his income statement makes a new record. But from few years, he has decreased in the income statements' earning. Now, he started to use artificial methods to increase his earning. He started to convert some revenue expenditures into capital expenditures. He also changed the method of depreciation. He also reduced the future provisions of bad debts and other reserves. He also changed the inventory valuation method. By all these things effect on his earning. His net profit started to touch the sky but all is done for window dressing. He took big loan of $ 10,00,000 but within few years, he is unable to pay small interest of this loan because his quality of earning was low. Due to this, he became insolvent. Instead of caring the level of earning, he should care the quality of his earning. He should give time to satisfy his customers. He should also find the reasons why are their customers decreasing? So, after this study, he can take good decisions which will be helpful for increasing the quality of earning.
For getting high profit or showing it in the income statement, if we increase the selling prices of our inventory, it will just inflation in the value of inventory which will not work for the quality of earning in long run. When there will be big competition in the market, your inflation in the inventory may increase your sale value one or two years but next year your sales will decrease at the level which should be recorded in Guinness world records.
One of the other method of measuring the quality of earning is to measure the earning without changing in the accounting policies.
.For example : Mr. R is so intelligent businessman. Every year his income statement makes a new record. But from few years, he has decreased in the income statements' earning. Now, he started to use artificial methods to increase his earning. He started to convert some revenue expenditures into capital expenditures. He also changed the method of depreciation. He also reduced the future provisions of bad debts and other reserves. He also changed the inventory valuation method. By all these things effect on his earning. His net profit started to touch the sky but all is done for window dressing. He took big loan of $ 10,00,000 but within few years, he is unable to pay small interest of this loan because his quality of earning was low. Due to this, he became insolvent. Instead of caring the level of earning, he should care the quality of his earning. He should give time to satisfy his customers. He should also find the reasons why are their customers decreasing? So, after this study, he can take good decisions which will be helpful for increasing the quality of earning.
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