A company has a net income of \$500,000 and net cash flow from operating activities of \$400,000. Calculate the quality of earnings ratio and analyze what this indicates about the company's earnings quality.

• A. 0.50; This indicates that the company is generating significantly less cash than its reported income, suggesting very low earnings quality.
• B. 0.80; This indicates that the company is generating less cash than its reported income, which may suggest lower earnings quality.
• C. 1.00; This indicates perfect alignment between cash flow and income, suggesting high earnings quality.
• D. 1.25; This indicates that the company is generating more cash than its reported income, suggesting high earnings quality.

Answer: (B)