On the Differences between Accrual Accounting Figures and Cash Flows: The Case of Working Capital

1985 ◽  
Vol 14 (1) ◽  
pp. 75 ◽  
Author(s):  
Yoram Kroll
Keyword(s):  
Cash Flows ◽  
Working Capital ◽  
Accrual Accounting

scholarly journals Net Operating Working Capital, Capital Budgeting, And Cash Budgets: A Teaching Example

2016 ◽  
Vol 9 (1) ◽  
pp. 31-38 ◽  
Author(s):  
James A. Turner
Keyword(s):  
Student Satisfaction ◽  
Cash Flow ◽  
Capital Budgeting ◽  
Cash Flows ◽  
Net Income ◽  
Working Capital ◽  
Accrual Accounting ◽  
Operating Cash Flows ◽  
Present Information ◽  
Budgeting Process

Many introductory finance texts present information on the capital budgeting process, including estimation of project cash flows.  Typically, estimation of project cash flows begins with a calculation of net income.  Getting from net income to cash flows requires accounting for non-cash items such as depreciation.  Also important is the effect of changes in net operating working capital on cash flow.  While students readily understand how to account for depreciation when calculating cash flow, they typically have much more difficulty understanding how and why changes in working capital affect cash flows.  This paper develops a teaching example to show exactly how and why changes in net operating working capital affect cash flows.  The example shows how to derive operating cash flows for a proposed project using the accrual accounting method and then shows a cash budget for the same project.  Finally, the example shows that the discrepancy between the cash flows shown in the cash budget and the operating cash flows can be resolved by accounting for changes in working capital.  A survey of students in an MBA managerial finance course indicates student satisfaction with the teaching example and gives evidence that students prefer the teaching example to explanations of the effect of working capital on project cash flows given in the assigned text.

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

2007 ◽  
Vol 82 (1) ◽  
pp. 205-240 ◽  
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.

scholarly journals Simulation evidence on the properties of alternative measures of working capital accruals

2017 ◽  
Vol 25 (4) ◽  
pp. 378-394
Author(s):  
Javad Izadi Zadeh Darjezi ◽  
Homagni Choudhury ◽  
Alireza Nazarian
Keyword(s):  
Cash Flow ◽  
Estimation Error ◽  
Explanatory Power ◽  
Cash Flows ◽  
Working Capital ◽  
Accrual Quality ◽  
Content Type ◽  
Explanatory Variables ◽  
Study Results ◽  
The Uk

Purpose This paper aims to investigate the specification and power of tests based on the DD and modified DD model through the UK data between years 2000 and 2013, and make comparisons with tests using working capital accruals creating a measure of accruals quality as the standard deviation of the residuals value from firm-specific regressions base on working capital accruals on last, current and one-year-ahead cash flows from operations. Design/methodology/approach This study focuses both on the DD model and modified DD model to find out which of them can more accurately capture total working capital accrual estimation error and accrual quality. According to the DD model, the past, current and future net cash from operating activities as the three years’ operating cash inflows or outflows become omitted and correlated variables. In this study, the authors continue to document residuals from the DD and MDD models to demonstrate properties that are more consistent with behaviours of accruals estimation errors. Therefore, in this study, the authors are looking to compare the results from both the MDD and DD models and find which one of them is more effective in explaining the working capital accruals in the UK. Findings The authors find that adding additional explanatory variables may add additional explanatory power of variables to the DD model and extent to which accruals map into cash flow insights based on the UK data. This study is empirically well fitting with the internal workings of cash flows. As investors fixate only on the accounting earnings, they may fail to reflect fully on information contained within cash flow components and working capital accruals of current and future earnings. Originality/value The authors compare different equation to cover more items of working capital accruals. In addition, after examining earnings and accrual quality, the findings show that the average UK company behaviour was quite similar to the behaviour that was founded earlier for both models in the USA. Furthermore, this study results show that more volatility of sales, cash flow, accruals and earnings make a lower accrual quality. The results demonstrate that both models can capture the power to predict working capital accruals. Moreover, we find that adding additional explanatory variable of employee growth rate adds additional explanatory variables to DD model.

scholarly journals The Quality of Accruals and Earnings: The Role of Accrual Estimation Errors

2002 ◽  
Vol 77 (s-1) ◽  
pp. 35-59 ◽  
Author(s):  
Patricia M. Dechow ◽  
Ilia D. Dichev
Keyword(s):  
Estimation Error ◽  
Cash Flows ◽  
Empirical Measure ◽  
Earnings Persistence ◽  
Working Capital ◽  
Estimation Errors ◽  
Accrual Quality ◽  
Flows Over Time

This paper suggests a new measure of one aspect of the quality of working capital accruals and earnings. One role of accruals is to shift or adjust the recognition of cash flows over time so that the adjusted numbers (earnings) better measure firm performance. However, accruals require assumptions and estimates of future cash flows. We argue that the quality of accruals and earnings is decreasing in the magnitude of estimation error in accruals. We derive an empirical measure of accrual quality as the residuals from firm-specific regressions of changes in working capital on past, present, and future operating cash flows. We document that observable firm characteristics can be used as instruments for accrual quality (e.g., volatility of accruals and volatility of earnings). Finally, we show that our measure of accrual quality is positively related to earnings persistence.

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