Inflation and Nominal Financial Reporting: Implications for Performance and Stock Prices

ABSTRACT: The monetary unit assumption of financial accounting assumes a stable currency (i.e., constant purchasing power over time). Yet, even during periods of low inflation or deflation, nominal financial statements violate this assumption. I posit that, while the effects of inflation are not recognized in nominal statements, such effects may have economic consequences. I find that unrecognized inflation gains and losses help predict future cash flows as these gains and losses turn into cash flows over time. I also find significant abnormal returns to inflation-based trading strategies, suggesting that stock prices do not fully reflect the implications of the inflation effects for future cash flows. Additional analysis reveals that stock prices act as if investors do not fully distinguish monetary and nonmonetary assets, which is fundamental to determining the effects of inflation. Overall, this study is the first to show that, although inflation effects are not recognized in nominal financial statements, they have significant economic consequences, even during a period in which inflation is relatively low.

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Do Reconciliations Of Segment Earnings Affect Stock Prices?

Journal of Applied Business Research (JABR) ◽

10.19030/jabr.v28i5.7248 ◽

2012 ◽

Vol 28 (5) ◽

pp. 1085 ◽

Cited By ~ 4

Author(s):

Dana Hollie ◽

Shaokun Carol Yu

Keyword(s):

Financial Reporting ◽

Stock Prices ◽

Firm Growth ◽

Abnormal Returns ◽

Cash Flows ◽

Management Approach ◽

Firm Level ◽

Return On Equity ◽

The Difference ◽

Segment Disclosures

While SFAS No. 131 is intended to increase the transparency of financial reporting using a management approach, it may reduce shareholders ability to interpret segment disclosures relative to the industry approach employed under SFAS No.14. This study investigates whether segment reconciliation differences affect stock prices and whether abnormal returns can be earned using information about two components of earnings: aggregated segment earnings and segment earnings reconciliations. We compute reconciliations as the difference between firm-level consolidated earnings and aggregated segment-level earnings. Firms that report negative SERs have greater sales and profitability, greater return on equity, as well as more operating cash flows and firm growth. This suggests that firms that report aggregated segment earnings greater than firm-level consolidated earnings may be better off financially. Our findings show that mispricing does occur when firms report positive SERs by the market, underestimating the segment earnings reconciliation component of earnings persistence. Investors can also earn positive abnormal returns when investors take a long (short) position with the portfolio with the highest (lowest) absolute SERs. On the contrary, we find investors earn negative abnormal returns when firms report negative SERs. Collectively, this study provides evidence that mispricing occurs and that investors over/underestimate the importance and/or persistence of segment earnings reconciliations.

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Implementation of Statistical Indicators to Analysis of Effectiveness of Cash-Flows of the Enterprise

Bulletin of Taras Shevchenko National University of Kyiv Economics ◽

10.17721/1728-2667.2019/202-1/5 ◽

2019 ◽

pp. 34-42

Author(s):

H. Rohanova

Keyword(s):

Cash Flow ◽

Financial Reporting ◽

Flow Analysis ◽

Cash Flows ◽

Operating Conditions ◽

Flow Management ◽

Cash Flow Management ◽

Flows Over Time ◽

Statistical Indicators ◽

Over Time

The contemporary methods of corporate cash flow analysis are the object of this study. One of the most problematic points is how to provide proper cash flow analysis on a formation simultaneity basis over time. The classical methods of corporate cash flow management efficiency analysis are considered and the basic parameters of its indicators are determined during the study. Unstable operating conditions of domestic companies, as well as the existing inconsistency of the corporate reporting with International Financial Reporting Standards, make it difficult to generate timely and adequate information about cash flows of a company. The main phases of cash flow management effectiveness analysis are defined herein. They include collecting and processing the data, identifying the factors and risks, analyzing the cash flows of the previous period, determining the financial resources and cash needs, budgeting the investments and monitoring the cash flows. Throughout this study, it is proposed to improve the quality of cash flow analysis by introducing certain statistical cash flow analysis indicators. Due to this, it is possible to obtain a high-quality and comprehensive assessment of the formation of simultaneity and expenditure of cash flows over time. The drawbacks of the classical (horizontal, vertical, comparative and ratio) methods of analysis are also described herein. Thus, certain classical statistical indicators are proposed to apply while evaluating the cash flows. Compared to other classical methods, statistical analysis has certain advantages as it allows to identify the relationships between cash flows, the closeness of such relationships and their volatility, thereby making the mechanism for evaluating cash flows more holistic.

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The Predictive Ability of Quarterly Financial Statements

International Journal of Financial Studies ◽

10.3390/ijfs9030050 ◽

2021 ◽

Vol 9 (3) ◽

pp. 50

Author(s):

Hui Zhou ◽

Worapree Ole Maneesoonthorn ◽

Xiangjin Bruce Chen

Keyword(s):

Financial Reporting ◽

Predictive Ability ◽

Financial Statements ◽

Cash Flows ◽

Policy Implications ◽

Quarterly Data ◽

Time Series Modelling ◽

Modelling Techniques ◽

Future Cash Flows

A fundamental role of financial reporting is to provide information useful in forecasting future cash flows. Applying up-to-date time series modelling techniques, this study provides direct evidence on the usefulness of quarterly data in predicting future operating cash flows. Moreover, we show that the predictive gain from using quarterly data is larger for asset-heavy industries and industries with higher levels of earnings smoothness. This study contributes to the accounting literature by examining the usefulness of quarterly financial statements in predicting the realization of future cash flows. Our results help fill the gap in knowledge on quarterly financial statements and provide new insights on why the frequency of financial reporting matters. In addition, our findings have important policy implications for the ongoing debate over interim reporting requirements in multiple jurisdictions around the world.

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Does the Mandatory Adoption of IFRS Improve the Association between Accruals and Cash Flows? Evidence from Accounting Estimates

Accounting Horizons ◽

10.2308/acch-52262 ◽

2018 ◽

Vol 33 (1) ◽

pp. 39-59

Author(s):

Jimmy F. Downes ◽

Tony Kang ◽

Sohyung Kim ◽

Cheol Lee

Keyword(s):

Financial Reporting ◽

Cash Flows ◽

Data Availability ◽

The European Union ◽

Accounting Quality ◽

Financial Reporting Standards ◽

Ifrs Adoption ◽

Accounting Estimates ◽

Accounting Accruals ◽

Future Cash Flows

SYNOPSIS We investigate the effect of mandatory International Financial Reporting Standards (IFRS) adoption in the European Union on the association between accounting estimates and future cash flows, a key concept of accounting quality within the International Accounting Standard Board conceptual framework. We find that the predictive value of accounting estimates improves after IFRS adoption. This improvement is largely driven by specific types of accounting estimates, such as accounts receivable, depreciation, and amortization expense. We also find that the improvement is concentrated in countries with larger differences between pre-IFRS domestic GAAP and IFRS. Our findings suggest that IFRS allow managers to exercise their judgment to provide information about future cash flows through the more subjective/judgmental portion of accounting accruals. JEL Classifications: M16; M49; O52. Data Availability: The data used in this study are from public sources identified in the study.

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Interim Reporting Frequency and the Mispricing of Accruals

Accounting Horizons ◽

10.2308/acch-52097 ◽

2018 ◽

Vol 32 (3) ◽

pp. 29-47

Author(s):

Shou-Min Tsao ◽

Hsueh-Tien Lu ◽

Edmund C. Keung

Keyword(s):

Financial Reporting ◽

Stock Prices ◽

Data Availability ◽

Financial Reports ◽

Regulatory Changes ◽

Sample Composition ◽

Reporting Frequency ◽

Over Time ◽

Jel Classifications ◽

Accrual Mispricing

SYNOPSIS This study examines the association between mandatory financial reporting frequency and the accrual anomaly. Based on regulatory changes in reporting frequency requirements in Taiwan, we divide our sample period into three reporting regimes: a semiannual reporting regime from 1982 to 1985, a quarterly reporting regime from 1986 to 1987, and a monthly reporting regime (both quarterly financial reports and monthly revenue disclosure) from 1988 to 1993. We find that although both switches (from the semiannual reporting regime to the quarterly reporting regime and from the quarterly reporting regime to the monthly reporting regime) hasten the dissemination of the information contained in annual accruals into stock prices and reduce annual accrual mispricing, the switch to monthly reporting has a lesser effect. Our results are robust to controlling for risk factors, transaction costs, and potential changes in accrual, cash flow persistence, and sample composition over time. These results imply that more frequent reporting is one possible mechanism to reduce accrual mispricing. JEL Classifications: G14; L51; M41; M48. Data Availability: Data are available from sources identified in the paper.

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Megascreens USA Inc.—A Foreign Operations Case

Issues in Accounting Education ◽

10.2308/iace.2007.22.4.579 ◽

2007 ◽

Vol 22 (4) ◽

pp. 579-590 ◽

Cited By ~ 5

Author(s):

Charles A. Carslaw ◽

S. E. C. Purvis

Keyword(s):

Financial Reporting ◽

Foreign Currency ◽

Financial Statements ◽

The United States ◽

Cash Flows ◽

Consolidated Financial Statements ◽

Comprehensive Overview ◽

Financial Reporting Standards ◽

Foreign Operations ◽

Statement Of Cash Flows

This relatively short case gives students a comprehensive overview of the steps required to prepare consolidated financial statements under U.S. GAAP when a subsidiary prepares its accounts under a foreign GAAP—in this case, International Financial Reporting Standards (IFRS). While the case is closely based on an actual Australasian company seeking listing in the United States, the product and the exact financial details are disguised. Specifically, the case exposes students to the following: accounting for foreign currency transactions; adjustments to convert foreign GAAP to U.S. GAAP (accounting for license fees); translation of financial statements; change of functional currency; remeasurement of financial statements; and foreign consolidation and statement of cash flows with foreign operations. The case has been field-tested in an advanced accounting course and is also suitable for use in international accounting courses. Both undergraduate and graduate students have profited from the case.

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

Corporate Ownership and Control ◽

10.22495/cocv13i3c1p2 ◽

2016 ◽

Vol 13 (3) ◽

pp. 164-172 ◽

Cited By ~ 1

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.

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Usefulness of Accounting Estimates

Journal of Accounting Auditing & Finance ◽

10.1177/0148558x16657756 ◽

2016 ◽

Vol 32 (1) ◽

pp. 123-135 ◽

Cited By ~ 1

Author(s):

Li Li Eng ◽

Thanyaluk Vichitsarawong

Keyword(s):

Cash Flow ◽

Exploratory Study ◽

Abnormal Returns ◽

Cash Flows ◽

Recent Period ◽

Future Earnings ◽

China And India ◽

Accounting Estimates ◽

Out Of Sample ◽

Over Time

This is an exploratory study to examine the quality or usefulness of accounting estimates of companies in China and India over time. Specifically, we examine how well the accounting estimates are able to predict future earnings and cash flows during the period 2003-2013. The results for India indicate that the out-of-sample earnings and cash flow predictions derived are more accurate and more efficient in the more recent period (2010-2013) than the earlier period (2003-2006). In contrast, the out-of-sample earnings and cash flow predictions for China are generally more biased, less accurate, and less efficient. The results indicate abnormal returns earned on hedge portfolios formed on earnings (cash flow) predictions for India in the recent period. In contrast, none of the portfolios for China earn positive returns. The results suggest that the accounting estimates in India in recent years have become better predictors of future earnings and cash flow than accounting estimates in the earlier period. However, the accounting estimates in China are not relevant for predicting earnings and cash flows over the years in the sample period.

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Instructional Case: General Host: Accounting for a Bond Refunding

Issues in Accounting Education ◽

10.2308/iace.1999.14.3.451 ◽

1999 ◽

Vol 14 (3) ◽

pp. 451-464 ◽

Cited By ~ 1

Author(s):

Mary Beth Mohrman

Keyword(s):

Earnings Management ◽

Stock Prices ◽

Cash Flows ◽

Economic Consequences ◽

Financial Accounting ◽

Business Press ◽

Paper Money ◽

Book Values ◽

The Relationship ◽

Interest Expense

This assignment, which involves accounting for a simple bond refunding, achieves several objectives. First, it reinforces basic concepts in bond accounting, such as cash flows, book values, interest expense and gains/losses from early extinguishment. Second, it leads students to critically analyze an article from the popular business press. Third, it illustrates many important issues in financial accounting, such as earnings management, the relationship between earnings and stock prices, and economic consequences. Students are asked to read “Paper Money” from Forbes' “Numbers Game” column. The article describes General Host's bond exchange offer and questions the recognition of a gain in such circumstances. The case assignment requires students to carefully analyze the bond exchange and to question many of the authors' assumptions about the economic impacts of the exchange offer. I have used this case successfully in undergraduate intermediate accounting classes and in an introductory financial accounting course for M.B.A. students.

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Instructional Case: Worldwide Shipping Corporation Ltd: Early or Late Adoption of a New International Accounting Standard?

Issues in Accounting Education ◽

10.2308/iace.1999.14.2.211 ◽

1999 ◽

Vol 14 (2) ◽

pp. 211-231

Author(s):

Peter Lee ◽

Pearl Tan

Keyword(s):

Financial Reporting ◽

Financial Analysis ◽

Balance Sheet ◽

Financial Statements ◽

Economic Consequences ◽

International Accounting ◽

Accounting Choice ◽

Accounting Standard ◽

The Impact ◽

International Accounting Standard

The management of Worldwide Shipping Corporation Ltd (hereafter “Worldwide Shipping”) is confronted with a dilemma when a new international accounting standard on leases is introduced which contains a transitional provision allowing firms to defer implementation for a period of four years. Students are required to put themselves in the position of managers who have to weigh the adverse impact of early adoption of the new accounting standard against a responsibility for fair financial reporting. Worldwide Shipping is a multifaceted case that can be used as an accounting case study or a financial analysis study. The objectives of the case are threefold. First, it aims to provide students with a better understanding of the impact of off-balance sheet transactions (in this case, sale-leaseback contracts) on a firm's financial statements. Second, it requires students to examine implications of accounting choice on management compensation and debt-contracting costs, as well as the perplexing problem of recognition in financial statements vs. footnote disclosures. By putting students in the position of managers, the case increases students' awareness of the possible economic consequences arising from accounting choice. Third, it provides students with a useful exercise in the mechanics of effecting a change in accounting method using the retroactive method.

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