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 .

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 Cash Flow Information And The Prediction Of Financially Distressed Mining, Oil And Gas Firms: A Comparative Study

2011 ◽  
Vol 10 (3) ◽  
pp. 78 ◽  
Author(s):  
Terry J. Ward
Keyword(s):  
Comparative Study ◽  
Cash Flow ◽  
Financial Distress ◽  
Oil And Gas ◽  
Cash Flows ◽  
Distressed Firms ◽  
Flow Information ◽  
Financially Distressed ◽  
Oil And Gas Firms

<span>This study tests whether cash flow information is more useful to creditors in predicting financially distressed mining, oil and gas firms than it is in predicting financial distress in other industries. The results of this study suggest that cash flows are more useful to creditors in predicting financially distressed mining, oil and gas firms than they are predicting financially distressed firms in other industries. Results also show that different cash flows are useful in predicting financial distressed mining, oil and gas firms than are useful in predicting financially distressed control firms.</span>

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.

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.

scholarly journals The impacts of free cash surplus flows, audit quality and ownership on earnings management: The Jordan case

2018 ◽  
Vol 15 (4-1) ◽  
pp. 222-230 ◽  
Author(s):  
Ahmed Mushref Salim Al-Omush ◽  
Ali Mohammad Al-Attar ◽  
Walid Muhammad Masadeh
Keyword(s):  
Earnings Management ◽  
Cash Flow ◽  
Financial Distress ◽  
Audit Quality ◽  
Listed Companies ◽  
Cash Flows ◽  
Fund Flows ◽  
Mixed Support ◽  
Cash Flow Statement ◽  
Statement Of Cash Flows

This paper primarily aims to identify and evaluate the effect of Free Cash Surplus flows, Audit Quality and the ownership on Earnings Management. The study shows that financial distress has a significant impact on earnings management for samples on the Jordanian listed companies during (2003-2016). The Cash Flow Statement provides information on the flow of cash in and out of the organization over a specific period. It shows how an organization spends its money (cash outflows) as well as the source of the money (cash inflows). The Cash Flow Statement – additionally alluded to as the statement of cash flows or fund flows, which is one of the financial statements that is often utilized in the measurement of an organization’s financial performance and overall wellbeing. The study also investigates the prevalence of both accrual and base earnings management for the empirical corporate finance which claims that the better corporate governance constraints between earnings management and the relation of high free-cash -flows firms the more will the increase will be at the income management and the earnings management. Although, the research has addressed the issues of earnings management and the real activities handling; this research paper put these two issues together. The analysis provides a mixed support when using different earnings management detection models. The findings of this study could serve as a guideline to a proper and understanding of earnings management to public listed companies, regulators, and various stakeholders

scholarly journals Toward Student Development Of A Better Understanding Of The Cash Flow Statement

2011 ◽  
Vol 18 (4) ◽  
Author(s):  
John R. Mills ◽  
Lynn Bible
Keyword(s):  
Cash Flow ◽  
Student Development ◽  
Cash Flows ◽  
Financial Flexibility ◽  
Flow Information ◽  
Preliminary Study ◽  
Cash Flow Statement ◽  
Statement Of Cash Flows ◽  
Analytical Tools

<h1 style="text-align: justify; margin: 0in 0in 0pt;"><span style="font-family: &quot;Times New Roman&quot;,&quot;serif&quot;; font-size: 10pt;">FASB Statement No. 95, Statement of Cash Flows has now been in existence for more than ten years (since 1988) and yet, there still has not been any consensus about how to effectively evaluate information provided from this statement. Accounting educators should be the primary personnel for disseminating the necessary information for understanding the cash flow statement as well as for providing the analytical tools for evaluating the cash flow information.<span style="mso-spacerun: yes;">&nbsp; </span>Carslaw and Mills (1992) provided a preliminary study that examined the intermediate textbooks to determine what the authors were providing in terms of analytical tools for evaluating cash flow information. The study concluded that while all the textbook authors point out that the cash flow statement should be used to evaluate liquidity and financial flexibility, none provided analytical tools for evaluation. The Carslaw and Mills article then provided a series of suggested ratios that they felt might provide a foundation for analyzing cash flow information.<span style="mso-spacerun: yes;">&nbsp; </span>This paper is a follow-up of the prior study. We reviewed the information in the current intermediate accounting texts that provides a basis for the evaluation of the cash flow statement. Our conclusion is that, while some authors have attempted to provide better measures of cash flow information, ten years later, there is still no common consensus among authors on providing the necessary tools for properly analyzing cash flow information.</span></h1>

Cash Flow Statement in Russian and International Practice

Auditor ◽  
2020 ◽  
Vol 6 (9) ◽  
pp. 35-41
Author(s):  
I. Dmitrieva ◽  
Yu. Kharakoz
Keyword(s):  
Cash Flow ◽  
Financial Reporting ◽  
Accounting Standards ◽  
The United States ◽  
Cash Flows ◽  
Accounting Systems ◽  
Generally Accepted Accounting Principles ◽  
Financial Reporting Standards ◽  
The World ◽  
Cash Flow Statement

Th e article discusses the world practice of applying accounting standards for the formation of a cash flow statement. In particular, the requirements for providing information on cash flows in national accounting systems were studied: generally accepted accounting principles of the United States, international financial reporting standards and Russian standards.

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.

Does Financial Reporting Conservatism Mitigate Underinvestment?

2017 ◽  
Vol 34 (2) ◽  
pp. 258-283 ◽  
Author(s):  
Hyun A. Hong ◽  
Yongtae Kim ◽  
Gerald J. Lobo
Keyword(s):  
Information Asymmetry ◽  
Cash Flow ◽  
Financial Reporting ◽  
Cash Flows ◽  
Agency Conflicts ◽  
Negative Relation ◽  
Investment Projects ◽  
External Capital ◽  
Cash Flow Volatility

This study examines the role of financial reporting conservatism in mitigating underinvestment problems. Recognizing that volatile cash flows increase the need to access external capital markets and that agency conflicts and information asymmetry make external capital costlier than internal capital, which leads managers to forgo valuable investment projects, Minton and Schrand document a negative relation between cash flow volatility and investment. We draw on Minton and Schrand’s framework to isolate underinvestment problems and hypothesize and document that conservatism mitigates the negative relation between cash flow volatility and investment and that this mitigative effect is more pronounced for firms with ex ante more severe agency conflicts. We also document that conservatism mitigates the sensitivity of investment to cash flow volatility by facilitating access to external capital.

Sign in / Sign up

Export Citation Format

Share Document