Question

A high quality of earnings is indicated by: Declaration of both cash and stock dividends

a)A history of increasing earnings and conservative accounting methods
b)Earnings derived largely from newly introduced products
c)Use of FIFO method of inventory during sustained inflation.

Answer 1

Quality of earnings is best indicated by consistent, increasing earnings and conservative accounting practices. High profits do not guarantee high capital gains due to the influence of market expectations and initial stock valuations.

Step-by-step explanation:

A high quality of earnings is indicated by a history of increasing earnings and conservative accounting methods. High profits do not necessarily equate to high capital gains for investors due to various factors such as market expectations, share price valuations, and external economic conditions. High earnings may already be reflected in the stock price, reducing the potential for substantial capital gains.

Furthermore, dividend payments and capital gains are two forms of return that an investor can expect from a company. Specific investment strategies considering risk, diversification, and time horizons should be employed rather than solely focusing on a company's past profit records for generating high capital gains.