How is 'earnings quality' defined in financial reporting?

Earnings quality refers to the degree to which reported income provides a reliable indicator of a company's true economic performance. It encompasses the sustainability and realism of earnings, focusing on whether the income figures are genuinely indicative of the underlying financial health and operational efficiency of the business rather than merely the result of accounting adjustments or manipulations.

A higher earnings quality means that the reported earnings are more likely to be repeated in the future, thus offering stakeholders a trustworthy basis for decision-making, such as assessing the company's valuation or making investment choices. Therefore, option B accurately captures this concept by emphasizing the importance of income reflecting the true economic performance of the company.

Other options, while related to aspects of earnings, do not directly address the notion of quality in the same way. Total income reported over a period (option A) does not provide insight into the reliability or sustainability of those earnings. Consistency over time (option C) may suggest a level of predictability, but it does not inherently address whether those earnings are genuine reflections of performance. Lastly, the net profit margin (option D) focuses on profitability as a percentage of sales rather than the integrity and economic reality of the reported earnings.