Managing working capital, cash flows and financial risks

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

International Journal of Accounting and Information Management ◽

10.1108/ijaim-12-2016-0114 ◽

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.

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

The Accounting Review ◽

10.2308/accr.2002.77.s-1.35 ◽

2002 ◽

Vol 77 (s-1) ◽

pp. 35-59 ◽

Cited By ~ 2087

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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Normalizing Terminal Year Cash Flows for Stable Working Capital Investment

Corporate and Project Finance Modeling ◽

10.1002/9781118957394.ch29 ◽

2014 ◽

pp. 369-376

Keyword(s):

Capital Investment ◽

Cash Flows ◽

Working Capital

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Globalization of Financial Risks and Evaluation of Common Stocks

Global Strategies in Banking and Finance - Advances in Finance, Accounting, and Economics ◽

10.4018/978-1-4666-4635-3.ch015 ◽

2014 ◽

pp. 231-240

Author(s):

Dilaysu Cinar

Keyword(s):

Financial Markets ◽

Interest Rates ◽

Global Economy ◽

Cash Flows ◽

Financial Risks ◽

Treasury Bills ◽

Government Bonds ◽

Common Stocks ◽

Management Policies ◽

Globalization Strategy

Risk can be defined as uncertainty about the events that will occur in the future. Risks are encountered in all areas of life, and become more important when it comes to financial markets. Risk in financial markets is defined as investment securities. If the investment vehicle is government bonds or treasury bills, they are considered to be free of risk. Because of the sudden changes in exchange rates in the process of globalization or fluctuations in interest rates influencing the cash flows of companies, most companies consider hedging as a viable part of the globalization strategy. Risk management policies to ease problems and disasters, which may arise from the use of instruments. The stock market serves as a bridge between economic activity and finance under favor of functions such as reducing the risk of investment, and it meets the capital needs for companies. For this reason, the development of stock markets plays an important role for the global economy and finance. Thus, the aim of this chapter is to introduce financial risks and their effect on common stocks.

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