Frequently, in connection with an acquisition, the purchaser will want a thorough understanding of the earnings power and the likelihood of consistency of earnings in the future. Often financial statements contain erratic and /or one-time items of income or expense; the best practice in an acquisition or analysis of a company potential is to prepare a Quality of Earnings report.
This report will examine the transactions at a detailed level and provide detailed and summary information regarding the propriety of the accounting treatment, the historical and potential future earnings and cash flows of a company to be acquired. The key is to filter out non-recurring or inconsistent or inaccurately reported data that may otherwise mislead the buyer regarding the main sources of income and expense: past, present, and future. Preparation of strong Quality of Earnings reports requires not only audit, tax, and general financial analysis skills, but also requires a detailed understanding of forecasting and trend analysis and comparative market data.
In short, a Quality of Earnings Report should enable understanding of the repeatability and consistency of the earnings power and cash flows to be generated by the acquisition target. This is a level of assurance demanded in this competitive market place.
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