Prior research uses mechanical procedures to estimate cash flow data. This study examines the accuracy of these procedures by measuring errors between estimated cash flows and reported cash flows. The results indicate that mechanical rules provide poor estimates for reported cash flows. We also show that the errors between cash flow estimates and reported cash flows can be reduced by adjustments made from footnote disclosures. However, large errors remain, even after adjustments are made from footnote disclosures. These remaining errors are correlated with firm specific characteristics such as sales (firm size), extraordinary items, foreign currency gains and losses, and changes in inventory.
PurposeTo describe and analyse the adoption of economic value added (EVA) income as a benchmark for setting pricing and other policies of a monopolistic state‐owned enterprise in the absence of normal benchmarking mechanisms.Design/methodology/approachBy earning zero economic value added profits the enterprise earns its cost of capital and escapes claims of monopolistic pricing and possible regulation. To test the success of this policy the financial series of the enterprise are developed from the date of incorporation in 1989 along with the economic value added series. The normal accounting profits are compared with the value added results. The value added results are used as a proxy for the pricing and other operational decisions of the firm that are not directly observable. The validity of the economic value added approach to provide a suitable benchmark is examined.FindingsProvides evidence that the enterprise was successful in avoiding charges of monopolistic pricing and subsequent regulation by linking pricing and other policies to its economic results. This was in a period when similar enterprises were regulate or threatened with regulation. The economic environment in the later years of the study have changed the goals of the enterprise.Research limitations/implicationsThis is a case study, so the success of this New Zealand based enterprise in benchmarking its policies to economic value added cannot be generalised to other companies and environments.Practical implicationsProvides a useful way to benchmark profits where a monopoly position may attract regulation. It also provides a system of benchmarking if other industry information is not available.Originality/valueThis paper identifies a unique position where the objective was to minimise economic income, rather than the usual goal of income maximisation.
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