I understand the difference between accruals vs cash… but I get confused as to how they use each of the terms above. I’m assuming high earnings quality means high persistence & sustainability, but individually I feel like my definition of the 2 are not the same as how CFAI or accounting in general defines them.
When I think of persistence, I think of how well a firm can “repeat” those earnings. And I view sustainable of how long they can “keep it up.” So when they say a firm with higher accruals has less persistence, and reverts to the mean quickly - I take it as b/c of the larger effects of smoothing, their reported number cannot be repeated so easily because eventually the effects of smoothing will go away. And in terms of sustainability, firms with higher accruals potentially means more manipulation (ie revenue recognition and likelihood of collecting payment) so there’s a higher chance that it won’t be as sustainable (if they are too aggressive in their accounting assumptions)?
Any input?