Information Provided by Accrual and Cash‐Flow Measures of Operating Activities

Abstract

This article examines accrual and cash-flow measures useful for observing companies' financing, investing and operating activities. It addresses the information provided jointly by income and operating cash flow, and reveals that information provided by these accounting measures is dependent on their relative magnitudes. A consistent pattern of income in excess of operating cash flow, with both measures appropriately adjusted and scaled, indicates superior company growth. Income and cash-flow patterns are associated significantly with various company financing, investing and operating attributes. Empirical tests confirm that both income and operating cash flow are important for observing company performance and prospects when considered jointly and when interpreted with respect to accounting measurement theory. At least for many companies, the results do not support the conventional wisdoms that accounting measures of income and operating cash flow converge over long periods of time and that earnings provide a reliable basis for cash-flow prediction.This article investigates accrual and cash-flow measures useful for observing corporate financial performance. Empirical research involving the accrual/cash-flow relation has concentrated primarily on information provided by reported earnings and the related components of accruals and operating cash flow (e.g., Bowen et al., ). Those works examine the incremental information provided by accruals with respect to cash flow 1 or the incremental information provided by cash flow with respect to earnings.We examine the information provided jointly by accrual and cash-based measures. Accounting measurement theory provides a basis for identifying this information. A theoretical analysis of the accounting measurement process indicates that the information provided by accrual and cash-based measures depends on their joint relation rather than on either measure alone or on their incremental contributions. In the analysis presented and ROBERT W.

Interindustry dividend policy determinants in the context of an emerging market

“…Higgins (1972) suggested that larger firms are more likely to pay higher dividends to shareholders than small firms because they have more flexibility in raising funds from capital markets. Similar positive relationships were noted in prior studies (e.g., Brockman & Unlu, 2009;Gugler, 1997;Ingram & Lee, 1997;Lloyd et al, 1985). Thus, it is hypothesised that: Hypothesis 2.…”

“…Meanwhile, Gugler (1997) contended that, in the US, large companies are inclined to pay dividends to prevent managers from investing for their own self-interest. Since small firms have to reinvest to grow, the funds available for dividend payouts would be reduced (Ingram & Lee, 1997). Brockman and Unlu (2009) found strong evidence of a positive relationship between the size of the firm and the dividend sizes of a large sample of firms across 52 countries, including emerging markets such as Malaysia.…”

The Incremental Information Content of the Cash Flow Statement: An Australian Empirical Investigation

“…The 1990 study by Charitou and Ketz, however, indicated that earnings were valued more than cash flows, and cash flows and accruals provide equal information in explaining security prices. Similar result was given by Ingram and Lee (1997);and Ali (1994) that used both linear and non-linear relationships when examining the incremental information content of earnings, working capital from operations and cash flows.…”

Information Provided by Accrual and Cash Flow Measures in Determining Firms’ Performance: Malaysian Evidence

“…Similar results were also found by [10] where it is shown that, on average, disaggregated earnings are better able to reflect value relevant events than disaggregated cash flows over return intervals of one to ten years. While many studies report evidence on the superiority of the accrual over the cash flow basis and vice versa, [12] approached this issue by examining both accrual and cash flow measures jointly in determining firms' performance. They found that, for companies having a consistent pattern of income in excess of operating cash flow, with both measures appropriately adjusted and scaled, indicates superior company growth.…”

“…As the sales increases, the payables and receivables will also increase but with a different magnitude. The offset is seldom complete because receivables generally change more rapidly than payables (due to the difference between selling and cost price), making the current assets increment being greater than the current liabilities increment [12] . For firms with operating growth, this situation is expected to persist, resulting in the gap between the payables and receivables becoming wider throughout the growth period.…”