On Alternative Measures of Accruals

2011 ◽  
Vol 25 (4) ◽  
pp. 811-836 ◽  
Author(s):  
Linna Shi ◽  
Huai Zhang
Keyword(s):  
Cash Flow ◽  
Balance Sheet ◽  
Cash Flows ◽  
Data Availability ◽  
Working Capital ◽  
Special Events ◽  
Two Measures ◽  
Cash Flow Statement ◽  
The Difference ◽  
Funds From Operations

SYNOPSIS This paper investigates the difference between two widely used measures of accruals and their differential impact on accrual strategy returns. The two measures are accruals computed using consecutive changes in the balance sheet items and accruals computed as earnings minus cash flows from operating activities, both from the cash flow statement. Our investigations reveal that the difference between the two measures is caused by four items and non-articulations in changes in working capital accounts and depreciation expenses, in addition to non-articulation events as identified by Hribar and Collins (2002). We find that the non-articulation in working capital accounts and depreciation expenses between the cash flow statement and other financial statements is surprisingly prevalent and economically significant, and it can be attributed to special events, errors made by Compustat, firms' inconsistent definitions, and non-standard classifications of assets/liabilities. We show that, after excluding non-articulation events, the accrual strategy returns are higher for accruals computed using balance sheet items than accruals computed using cash flow statement items. Further investigations suggest that the return differentials are mainly due to other funds from operations and the non-articulation in changes in accounts receivable. JEL Classifications: G12; G14; M41. Data Availability: Data used are available from the sources identified in the study.

Do PCAOB Inspections Improve Working Capital Accrual Reliability? Evidence from the PCAOB Annual versus Triennial Inspection Exposure

2020 ◽  
Vol 34 (2) ◽  
pp. 147-166 ◽  
Author(s):  
Cheol Lee ◽  
Jong Eun Lee ◽  
Myung Seok Park
Keyword(s):  
Cash Flow ◽  
Cash Flows ◽  
Data Availability ◽  
Earnings Persistence ◽  
Working Capital ◽  
Improve Working ◽  
Future Earnings ◽  
Public Company ◽  
Jel Classifications ◽  
Better Than

SYNOPSIS In this study, we examine whether the ability of working capital (WC) accruals to predict future earnings and cash flows differs between registrants whose auditors are subject to annual Public Company Accounting Oversight Board (PCAOB) inspections and those whose auditors are subject to triennial PCAOB inspections. We find that WC accruals of clients audited by auditors subject to annual PCAOB inspections enhance earnings persistence more and map into future cash flow realizations better than those audited by auditors subject to triennial PCAOB inspections. These findings are stronger for operating asset accruals than for operating liability accruals. Furthermore, after PCAOB inspection reports are released, improvements in WC accrual reliability are more evident for clients audited by annually inspected auditors than for clients audited by triennially inspected auditors. Overall, our findings suggest that more frequent PCAOB inspections help to improve WC accrual reliability. JEL Classifications: M41; M42; M48. Data Availability: The data are publicly available from the sources identified in the paper.

scholarly journals An evaluation of the usefulness of cash flow ratios to predict financial distress

2007 ◽  
Vol 7 (1) ◽  
Author(s):  
L. Jooste
Keyword(s):  
Cash Flow ◽  
Financial Reporting ◽  
Financial Distress ◽  
Balance Sheet ◽  
Cash Flows ◽  
Mean Values ◽  
Additional Information ◽  
Financial Failure ◽  
Flow Information ◽  
Cash Flow Statement

Purpose: With the introduction of the cash flow statement it became an integral part of financial reporting. A need arose to develop ratios for the effective evaluation of cash flow information. This article investigates cash flow ratios suggested by various researchers and suggests a list of ratios with the potential to predict financial failure. Design: The cash flow ratios suggested by researchers, from as early as 1966, are investigated and eight cash flow ratios selected for inclusion in an analysis to predict financial failure. Ten failed entities are selected for a cash flow evaluation by means of the selected ratios for five years prior to failure. For a comparison, non-failed entities in similar sectors are selected and also evaluated by means of the cash flow ratios. The mean values of each ratio, for each year prior to failure, were then calculated and the means of the failed entities were compared to the non-failed entities. Findings: The comparison revealed that cash flow ratios have predictive value with the cash flow to total debt identified as the best indicator of failure. It was also determined that, although failed entities have lower cash flows than non-failed entities, they also had smaller reserves of liquid assets. Furthermore, they have less capacity to meet debt obligations and they tend to incur more debt. The ratios of the failed entities were unstable and fluctuated from one year to the next. Finally, bankruptcy could be predicted three years prior to financial failure. Implications: Income statement and balance sheet ratios are not enough to measure liquidity. An entity can have positive liquidity ratios and increasing profits, yet have serious cash flow problems. Ratios developed from the cash flow statement should supplement traditional accrual-based ratios to provide additional information on the financial strengths and weaknesses of an entity .

Minority Interest in the Consolidated Retained Earnings Statement

2001 ◽  
Vol 15 (2) ◽  
pp. 119-146 ◽  
Author(s):  
Hugo Nurnberg
Keyword(s):  
Cash Flow ◽  
Balance Sheet ◽  
Financial Statements ◽  
Cash Flows ◽  
Parent Company ◽  
Consolidated Financial Statements ◽  
Entity Theory ◽  
Income Statement ◽  
Cash Flow Statement ◽  
Retained Earnings

Consolidated financial statements purport to report income, financial position, and cash flows of a parent company and its subsidiaries as if the group were a single company with one or more branches or divisions. Under the parent company theory, the consolidated entity perspective assumed in the consolidated income statement, the consolidated balance sheet, and the consolidated retained earnings statement differs from the consolidated entity perspective assumed in the consolidated cash flow statement. Even under extant expositions of the entity theory, the consolidated entity perspective assumed in the consolidated income statement, the consolidated balance sheet, and the consolidated cash flow statement differs from the consolidated entity perspective assumed in the consolidated retained earnings statement. This paper develops a consistent consolidated entity perspective for all four consolidated financial statements. It demonstrates that under the entity theory, consolidated retained earnings includes the separate equities of both the parent company stockholders and the minority interest. As such, both elements of retained earnings should be reported in the consolidated retained earnings statement to make it comparable to the consolidated retained earnings statement of companies without subsidiaries or with only wholly owned subsidiaries. The effect on certain financial ratios of public companies may be substantial. The paper also demonstrates that for purchased subsidiaries, minority interest in consolidated retained earnings includes unamortized write-ups of identifiable net assets and goodwill arising from purchase-type business combinations.

Dual Class Ownership and Tax Avoidance

2014 ◽  
Vol 89 (4) ◽  
pp. 1487-1516 ◽  
Author(s):  
Sean T. McGuire ◽  
Dechun Wang ◽  
Ryan J. Wilson
Keyword(s):  
Cash Flow ◽  
Tax Avoidance ◽  
Voting Rights ◽  
Cash Flows ◽  
Data Availability ◽  
Agency Conflicts ◽  
Single Class ◽  
The Difference ◽  
Cash Flow Rights ◽  
Dual Class

ABSTRACT: This study investigates whether the agency conflicts inherent in a dual class ownership structure are associated with the level of firms' tax avoidance. Dual class ownership presents a unique agency problem because insiders control a majority of the votes of a firm despite having claims to a minority of the firm's cash flows. We examine the level of tax avoidance for a sample of dual class firms and find that the extent of tax avoidance declines as the difference between voting rights and cash flow rights increases. We also compare the level of tax avoidance of dual class firms to a sample of propensity matched single class firms and find that dual class firms engage in less tax avoidance as the wedge between insiders' voting rights and cash flow rights increases. These findings are consistent with dual class ownership entrenching managers and allowing them to perform at a suboptimal level. Data Availability: Data used in this study are available from public sources identified in the paper.

scholarly journals The rules for the Cash Flow Statement in the International Financial Reporting Standard

2013 ◽  
Vol 7 (1-2) ◽  
pp. 71-73
Author(s):  
Anikó Türkössy
Keyword(s):  
Cash Flow ◽  
Financial Reporting ◽  
Balance Sheet ◽  
Cash Flows ◽  
Reporting Standard ◽  
International Financial Reporting Standard ◽  
Historical Changes ◽  
Income Statement ◽  
Cash Flow Statement ◽  
Statement Of Cash Flows

Cash flow statement may provide considerable information about what is really happening in a business beyond that contained in either the income statement or the balance sheet. Analyzing this statement should not present an intimidating task; instead it will quickly become obvious that the benefits of understanding the sources and uses of a company’s cash far outweigh the costs of undertaking some very straightforward analyses. The objective of IAS 7 is to require the presentation of information about the historical changes in cash and cash equivalents of an entity by means of a statement of cash flows, which classifies cash flows during the period according to operating, investing, and financing activities.

scholarly journals THE EFFECT OF WORKING CAPITAL MANAGEMENT ON FINANCIAL PERFORMANCE AND OPERATIONAL CASH FLOWS OF COMPANIES ACCEPTED IN TEHRAN SECURITIES EXCHANGE

2019 ◽  
Vol 7 (6) ◽  
pp. 625-632
Author(s):  
Ali Asghar Sameni ◽  
Razieh Fakour
Keyword(s):  
Financial Performance ◽  
Cash Flow ◽  
Cash Flows ◽  
Net Income ◽  
Capital Management ◽  
Working Capital ◽  
Working Capital Management ◽  
Operating Profit ◽  
Operating Cash Flow ◽  
The Difference

Purposes: Working capital management can have a huge impact on financial performance and operational cash flows. In this research, the effect of working capital management components on financial performance and operating cash flows have been investigated. Methodology: The data used in this study are financial statements of companies listed in Tehran securities exchange for the period 2007 to 2011. Results: The difference between sales and operating profit as a benchmark for measuring performance and the difference between operating cash flow and operating profit as a measure of operating cash flow has been used. Regression results show that there is no meaningful relationship between the components of working capital management with financial performance and operating cash flow. Implications/Applications: Net income represents the change in a business's financial circumstances incurred through that business choosing to run its revenue-producing operations for one specific time period. Because the business cannot choose to run its revenue-producing operations without incurring expenses while doing so, net income is equal to revenues minus expenses. Expenses are often divided up into additional categories for ease of comprehension. Revenues minus cost of sales is equal to gross profit; gross profit minus operating expenses is equal to operating profit. Novelty/Originality: The novelty of this study is a balance between current assets and current liabilities, as well as maintaining a balance between profitability and liquidity which can serve a great purpose in the economy.

Where Did All the Dollars Go? The Effect of Cash Flows on Capital and Asset Structure

2011 ◽  
Vol 46 (5) ◽  
pp. 1259-1294 ◽  
Author(s):  
Sudipto Dasgupta ◽  
Thomas H. Noe ◽  
Zhen Wang
Keyword(s):  
Cash Flow ◽  
Economic Effect ◽  
Balance Sheet ◽  
Cash Flows ◽  
Long Run ◽  
Goods Market ◽  
Short Run ◽  
Debt Market ◽  
Short And Long Term

AbstractThis paper documents the short- and long-term balance sheet effect of cash flows. We show that cash savings in the short run and debt reduction in both the short and the long run account for a substantial fraction of cash flow use. Although, in the long run, investment exhibits substantial sensitivity to cash flows, investment does not absorb the entire cash flow shock. In fact, the tighter the financial constraints, the smaller the fraction of cash flow absorbed by investment and the more by leverage reduction. Firms stage their response to increases in cash flow, delaying investment while building up cash stocks and reducing leverage. These results suggest that much of the short-run economic effect of cash flow shocks to the corporate sector may be channeled into the corporate debt market rather than the capital goods market, especially when financing constraints tighten.

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 PENERAPAN PSAK NO. 2 TENTANG LAPORAN ARUS KAS DALAM PENGAMBILAN KEPUTUSAN PADA PERUM BULOG DIRVE SULUT DAN GORONTALO

2015 ◽  
Vol 13 (03) ◽  
Author(s):  
Fanesa Isalia Minanda Syaefudin ◽  
Jenny Morasa ◽  
Stanly Alexander
Keyword(s):  
Decision Making ◽  
Cash Flow ◽  
Balance Sheet ◽  
Financial Statements ◽  
Operating Cash Flow ◽  
Cash Flow Statement ◽  
Quantitative Descriptive ◽  
One Year ◽  
Finance Department ◽  
Real State

In the company’s Financial Statements is a means of consideration in decision making so that, componentsin the financial statements must betrue and correct. In thedecision making companies should use the cash Flow Statement because sometimes the income and balance sheet does not show the real state of corporate finance. The purposeof this study to determine the application of the Cash Flow Statement in accordance with SFAS No. 2 in corporate decision. This type of research is quantitative descriptive. The results showed, net cash provided by the company during the year has decreased compared to the previous year. This study uses the ratio analysisin corporate decision making. The Ratio of Operating Cash Flow to Total Liabilities can be used as basis for decision making in the company repay its total Liability for one year of operation. The Ratio of Cash Flow to Current Liabilities can be used as the basis of the decision making companies when measuring the company’s ability to pay Current Liabilities by Net Operating Cash Flow. The Ratio of Cash Flow to Sales companies measure the company’s ability to measure the company’s ability to obtain cash from to sale. Leaders should Perum Bulog particularly the finance department needs to implement the Cash Flow Statement as the basis of its analysis so that can know the financial situation and can be used as a basis for decision making of the company.

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