The Incremental Information Content of Earnings, Working Capital from Operations, and Cash Flows

<span>This study investigates the relationship between the informativeness and the predictability of cash flow data. Predictability is defined as the ability of an accounting variable to predict future cash flows. Using a two-signal capital asset pricing model, this study predicts that the incremental informativeness of cash flows is an increasing function of its predictability and a decreasing function of the predictability of earnings. The empirical evidence is consistent with this prediction. This study contributes to the cash flow/earnings literature in that it identifies a context in which cash flow data possess significant incremental information content beyond that reflected in earnings. The research findings of this study also have methodological implications for other incremental information content studies. Specifically, it suggests that the informativeness of alternative information is an important factor in examining the incremental information of an accounting variable.</span>

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GASB No. 34's Governmental Financial Reporting Model: Evidence on Its Information Relevance

The Accounting Review ◽

10.2308/accr.2007.82.1.205 ◽

2007 ◽

Vol 82 (1) ◽

pp. 205-240 ◽

Cited By ~ 44

Author(s):

Elizabeth Plummer ◽

Paul D. Hutchison ◽

Terry K. Patton

Keyword(s):

School Districts ◽

Financial Reporting ◽

Default Risk ◽

Balance Sheet ◽

Cash Flows ◽

Working Capital ◽

Information Relevance ◽

Net Assets ◽

Accrual Basis ◽

The Government

This study uses a sample of 530 Texas school districts to investigate the information relevance of governmental financial statements published under Governmental Accounting Standards Board Statement No. 34 (GASB No. 34). Specifically, we examine whether the new government-wide statements provide information relevant for assessing a government's default risk, and if this information is incremental to that provided by the governmental funds statements. GASB No. 34 requires governments to publish governmental funds statements prepared on a modified accrual basis, and government-wide statements prepared on an accrual basis. We find that GASB No. 34's Statement of Net Assets (similar to a corporation's balance sheet) provides information relevant for assessing default risk, and this information is incremental to that provided by the governmental funds statements. However, GASB No. 34's Statement of Activities (similar to a corporation's income statement) does not provide information relevant for assessing default risk. The accrual “earnings” measure is not more informative than the modified-accrual “earnings” measure. A government's modified accrual earnings measure can be thought of as a type of measure of changes in working capital. Therefore, our results are consistent with research on corporate entities that attributes the superiority of earnings over cash flows primarily to working capital accruals and not long-term accruals. For our sample of school districts, evidence suggests that total net assets from the government-wide Statement of Net Assets, along with a measure of modified-accrual “earnings” from the governmental funds statement, provide the best information for explaining default risk.

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