b. the realism and sustainability of reported earnings.
Quality of Earnings:
Quality of earnings is the percentage of income that is due to higher sales or lower costs. An increase in net income without a corresponding increase in cash flow from operations is a red flag.
A ratio of greater than 1.0 indicates a company has high-quality earnings, and a ratio of less than 1.0 indicates a company has low-quality earnings. Earnings quality refers to the amount of earnings that come from the business operations themselves, like sales and operating expenses
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