Discretionary accounting choices and the predictive ability of accruals with respect to future cash flows

2012 ◽  
Vol 53 (1-2) ◽  
pp. 330-352 ◽  
Author(s):  
Brad A. Badertscher ◽  
Daniel W. Collins ◽  
Thomas Z. Lys
Keyword(s):  
Predictive Ability ◽  
Cash Flows ◽  
Accounting Choices ◽  
Future Cash Flows

scholarly journals Predictive ability of accruals before and after IFRS in the Brazilian stock market

2018 ◽  
Vol 29 (78) ◽  
pp. 375-389
Author(s):  
Terence Machado Boina ◽  
Marcelo Alvaro da Silva Macedo
Keyword(s):  
Stock Market ◽  
Financial Reporting ◽  
Predictive Ability ◽  
Discretionary Accruals ◽  
Cash Flows ◽  
Accounting Quality ◽  
Convenience Sample ◽  
Accounting Choices ◽  
Before And After ◽  
Future Cash Flows

ABSTRACT This study aimed to analyze and assess the predictive ability of discretionary accruals (DAs) and non-discretionary accruals (NDAs) for forecasting future cash flows before and after the convergence with International Financial Reporting Standards (IFRS) in Brazil. The study is warranted due to the scarcity of research in Brazil on the subject and is relevant because it aims to shed light on whether the changes occurring due to convergence with IFRS in Brazil have improved accounting quality. The accounting choices of managers and accountants in the Brazilian stock market, enabled by IFRS, contribute to an apparent improvement in accounting quality in terms of reliability, the faithful representation of entities’ equity and financial positions, and in particular, the predictive ability for forecasting future cash flows. The population was composed of publicly traded companies listed on the Bovespa and São Paulo Stock, Commodities, and Futures Exchange (BM&FBovespa) in 2004 to 2007 and 2010 to 2015. The non-probability convenience sample is composed of 715 enterprises, once companies from the “finance and insurance” and “funds” sectors and even those considered as “holding” were excluded. The data were pooled by year, as they contain different companies over the time series (unbalanced panel data). The DAs and NDAs produced prior to full convergence with IFRS are negative and statistically significant for predicting future cash flows in the Brazilian stock market, which indicated opportunistic/contractual earnings management. One of the possible explanations for this would be the influence of government tax authorities on Brazilian accounting norms, which could induce managers to manipulate accounting results with the aim of reducing earnings in order to pay fewer taxes, for example. The DAs and NDAs produced after IFRS are positive and statistically significant for predicting future cash flows in the Brazilian stock market, signaling the motivation of discretionary accounting choices under the informational aspect. Current DAs and NDAs add informational power compared to current aggregate accruals. It has also been observed that the current DAs and NDAs originating after IFRS in Brazil, compared to current aggregate accruals, have an informational gain in relation to those produced before.

scholarly journals Do Big 4 auditors improve the ability of goodwill to forecast future cash flows?

2016 ◽  
Vol 13 (3) ◽  
pp. 164-172 ◽  
Author(s):  
Ahmad Al-Hiyari ◽  
Rohaida Abdul Latif ◽  
Noor Afza Amran
Keyword(s):  
Financial Reporting ◽  
Predictive Ability ◽  
Cash Flows ◽  
Reporting Standard ◽  
Accounting Firms ◽  
Big 4 ◽  
Business Combination ◽  
Accounting Rules ◽  
Future Cash Flows ◽  
Professional Judgement

The accounting rules prescribed in Malaysian Financial Reporting Standard (MFRS) 3, Business combination, and (MFRS) 136, Impairment of Assets, give managers considerable reporting discretion in allocating goodwill and estimating its actual value. Agency theory predicts that managers may use the accounting discretion granted by the new rules to pursue their own interests at the expense of shareholders. Hence, auditors are required to exercise professional judgement when investigating hard-to-verify management assumptions and valuations. We exploit this issue by examining whether predictive ability of goodwill improved in the presence of Big 4 auditors. We provide evidence that goodwill has a significant predictive ability for second and third-year ahead cash flows which exists only in the firms audited by the large international reputable accounting firms. This suggests that Big 4 auditors play an important role in ensuring appropriate implementation of the present accounting for goodwill.

scholarly journals Foreign Monitoring and Predictability of Future Cash Flow

2019 ◽  
Vol 11 (18) ◽  
pp. 4832
Author(s):  
Jaehong Lee ◽  
Eunsoo Kim
Keyword(s):  
Cash Flow ◽  
Stock Exchange ◽  
Predictive Ability ◽  
Financial Statements ◽  
Cash Flows ◽  
Foreign Investors ◽  
Future Cash Flow ◽  
Flow Components ◽  
Future Cash Flows

A company’s sustainability is generally determined by whether it is able to create a positive long-term cash flow. This paper investigates whether the predictive ability of cash flows and earnings in forecasting future cash flows differs depending on the foreign investors’ ownership. Based on firms listed in the Korea Stock Exchange market from 2000 to 2017, we find that earnings and cash flow components of financial statements enhance the predictability of future cash flow in the Korean stock market. Conversely, foreign investors showed a tendency to decide on investments based on operating cash flow instead of earnings when predicting future cash flow. These findings indicate that reliability towards earnings may fall since foreign investors’ concerns are on the prospects of earnings management. These results were strengthened by the addition of several more analyses including cluster analyses, consideration of information asymmetry and the chaebol governance.

Accruals and the Prediction of Future Cash Flows

2001 ◽  
Vol 76 (1) ◽  
pp. 27-58 ◽  
Author(s):  
Mary E. Barth ◽  
Donald P. Cram ◽  
Karen K. Nelson
Keyword(s):  
Cash Flow ◽  
Predictive Ability ◽  
Cash Flows ◽  
Accounts Receivable ◽  
Accounts Payable ◽  
Aggregate Earnings ◽  
Industry Membership ◽  
Future Cash Flows

Building on the Dechow et al. (1998) model of the accrual process, this study investigates the role of accruals in predicting future cash flows. The model shows that each accrual component reflects different information relating to future cash flows; aggregate earnings masks this information. As predicted, disaggregating accruals into major components—change in accounts receivable, change in accounts payable, change in inventory, depreciation, amortization, and other accruals—significantly enhances predictive ability. Each accrual component, including depreciation and amortization, is significant with the predicted sign in predicting future cash flows, incremental to current cash flow. The cash flow and accrual components of current earnings have substantially more predictive ability for future cash flows than several lags of aggregate earnings. The inferences are robust to alternative specifications, including controlling for operating cash cycle and industry membership.

Comparing US-GAAP and Iran-GAAP operating cash flows to predict future cash flows

2015 ◽  
Vol 13 (1) ◽  
pp. 39-65
Author(s):  
Reza Janjani
Keyword(s):  
Financial Reporting ◽  
Predictive Ability ◽  
Cash Flows ◽  
Financial Analyst ◽  
Cross Sectional ◽  
Content Type ◽  
Generally Accepted Accounting Principles ◽  
Operating Cash Flows ◽  
Statement Of Cash Flows ◽  
Future Cash Flows

Purpose – The main objective of this paper is to compare the ability of US-generally accepted accounting principles (GAAP) operating cash flows versus Iran-GAAP operating cash flows in predicting future cash flows. Design/methodology/approach – The sample comprises 240 firms (1,200 firm-years) during the period from 2004 to 2008 for which operating cash flows and other variables are available. Cross-sectional and panel data regression models are used in testing the hypotheses. Findings – This study finds that operating cash flows based on Iran-GAAP are no more effective in predicting future cash flows than those based on USA-GAAP, and the predictive ability of the model is improved by adding the earnings accrual components to the operating cash flows. Originality/value – The study suggests that the Iranian accounting standard setting committee recommends that the statement of cash flows be prepared based on the three-category model instead of the five-category model in an attempt to converge with the International Financial Reporting Standards. Consistent with Financial Accounting Standards Board and financial analyst recommendations, the results reveal that earnings are a better predictor than cash flows from operations.

scholarly journals The Comparative Predictive Abilities Of Accrual Earnings And Cash Flows In Periods Of Economic Turbulence: The Case Of The IT Bubble

2010 ◽  
Vol 26 (1) ◽  
Author(s):  
Marilyn A. Waldron ◽  
Charles E. Jordan
Keyword(s):  
Financial Reporting ◽  
Predictive Ability ◽  
Cash Flows ◽  
Primary Objective ◽  
Decision Makers ◽  
Net Income ◽  
Font Size ◽  
Time Period ◽  
Economic Boom ◽  
Future Cash Flows

<p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="color: black; font-size: 10pt;"><span style="font-family: Times New Roman;">As set forth in SFAC No. 1, a primary objective of financial reporting is to provide information useful to decision makers. Predicting future cash flows represents a major goal of investors and creditors, and accrual and cash flow accounting information present two alternative factors useful in such predictions. The current research investigates the comparative abilities of accrual basis net income and historical cash flows from operations as predictors of future cash flows during both the economic boom leading up to the IT Bubble and the period of economic duress following the burst of that Bubble. Generally, results indicate that historical cash flows outperform accrual net income in predicting future cash flows during these periods of economic turbulence.<span style="mso-spacerun: yes;">&nbsp; </span>Additionally, the evidence reveals great variability in the predictive ability of accrual earnings during the time period studied, suggesting that accrual accounting estimates lose some of their precision during periods of extreme economic fluctuation. </span></span></p>

scholarly journals An Analysis Of The Comparative Predictive Abilities Of Operating Cash Flows, Earnings, And Sales

2011 ◽  
Vol 23 (3) ◽  
Author(s):  
Charles E. Jordan ◽  
Marilyn A. Waldron ◽  
Stanley J. Clark
Keyword(s):  
Predictive Power ◽  
Explanatory Power ◽  
Predictive Ability ◽  
Cash Flows ◽  
Share Price ◽  
Font Size ◽  
Operating Cash Flows ◽  
Aggregate Earnings ◽  
Future Cash Flows ◽  
Better Than

<p class="MsoBodyText" style="text-align: justify; margin: 0in 34.2pt 0pt 0.5in;"><span style="color: black; font-size: 10pt;"><span style="font-family: Times New Roman;">Prior studies (e.g., Greenburg et al., 1986; Murdoch and Krause, 1989) provide evidence that earnings outperforms historical cash flows in predicting future cash flows. Later research (e.g., Barth et al., 2001) demonstrates that the major accrual components of earnings each possess significant explanatory power in predicting future cash flows and that they augment, rather than replace, the predictive ability of aggregate earnings.<span style="mso-spacerun: yes;">&nbsp; </span>The current study furthers this work by examining the predictive power of another major component of earnings, i.e., sales.<span style="mso-spacerun: yes;">&nbsp; </span>Using share price as the dependent variable and as a proxy for future cash flows, this study compares the predictive abilities of changes in operating cash flows, earnings, and sales.<span style="mso-spacerun: yes;">&nbsp; </span>Similar to the findings in prior research, earnings predicts better than operating cash flows.<span style="mso-spacerun: yes;">&nbsp; </span>More importantly, however, sales predicts with greater accuracy than either operating cash flows or earnings.</span></span></p>

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