In the item they say the guy suspect that the accrual portion of earnings has increased and in the answers, to vindicate his suspicion, there is the choice of a lower cash flow based accrual ratio but it’s not the right answer.
I don’t get it. Isn’t a lower cash flow based accrual ratio means an increase of accrual portion of earnings?
Cash flow based accruals ratio = (NI - CFO - CFI) / AVG NOA
so if accruals increased in 2014 compared to 2013, NI would increase, and CFO and CFI would probably decrease as a result of less cash earnings. Therefore the numerator would increase and the ratio would increase, not decrease
Increase in ratio means that earnings quality has deteriorated =)