An earnings valuation approach concentrates on estimating the potential income the business may generate in the near term.

• A. True
• B. It uses market comparisons
• C. It focuses on replacement cost
• D. It ignores intangible assets

Answer: (A)

The main idea here is that the earnings valuation approach values a business based on what it is expected to earn in the near term. By projecting near-term earnings and converting that income stream into present value, this method focuses on income potential rather than on the size of assets or how similar companies are valued in the market. This is distinct from market-based approaches that rely on comparisons to other firms, and from replacement-cost methods that look at what it would cost to recreate the business’s assets. Intangible assets aren’t inherently ignored in earnings valuation—the approach centers on earnings power, which can reflect the contribution of intangibles to future profits.