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1 – 10 of over 10000James D. Stice, Earl K. Stice, David M. Cottrell and Derrald Stice
The operating activities section of the statement of cash flows presents a long-standing teaching challenge for accounting educators. The direct method is easy to understand yet…
Abstract
The operating activities section of the statement of cash flows presents a long-standing teaching challenge for accounting educators. The direct method is easy to understand yet difficult to prepare; the indirect method is harder to understand but easier to prepare. Many instructors address the two methods separately, requiring students to learn two different ways for preparing the operating section of a statement of cash flows. Because of this focus on the mechanics of preparation, the result is often an emphasis on how to prepare the cash flow statement rather than on the essential information the statement provides. In this paper, the authors note that both direct and indirect methods begin at the same point, that is, the income statement, and end at the same point, that is, cash flow from operations. Then, the authors describe one process by which the income statement and the balance sheet can be analyzed to provide the information required to present operating cash flow using either the direct or the indirect method. Using this approach allows students to apply one intuitive process for computing cash flow from operations rather than memorizing two different sets of rules for direct and indirect methods.
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– The purpose of this paper is to investigate the phenomena of convergence and stability of leverage reported by Lemmon et al. (2008).
Abstract
Purpose
The purpose of this paper is to investigate the phenomena of convergence and stability of leverage reported by Lemmon et al. (2008).
Design/methodology/approach
A dynamic trade-off model of the firm was used to simulate investment, leverage, and payout decisions for different types of firms. From an econometric standpoint, the Efficient Method of Moments was used to recover the structural parameters.
Findings
The structural model generates a leverage ratio that oscillates around a long-run, time-invariant level and consistently reproduces the convergence and stability of leverage reported by Lemmon et al. (2008). The model also suggests the causes of those observed properties of the data. That is, convergence is due to the mean-reversion of profits while stability is due to the different fundamental characteristics (e.g. capital elasticity, volatility of profits, etc.) of the firm.
Practical implications
Determining the optimal capital structure of a firm is a complex problem that has challenged academics and practitioners for a long time. Understanding leverage decisions is of great importance not only for financial managers, but also for investors, such as banks, debt-holders, equity-holders, and other capital providers, who need to understand how firms make capital structure decisions in order to achieve an efficient allocation of funds.
Originality/value
The author shows that the firm-specific fixed effects in leverage regressions are not related to the usual determinants (e.g. profitability, market-to-book ratio), but to the primitive characteristics of the firm (e.g. elasticity of capital in the production function, the volatility of profits, the capital depreciation rate, the income tax rate, etc.)
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This study aims to investigate the persistence ability of accounting variables, namely, abnormal earnings, book value, accruals and cash flows over a period of time and their…
Abstract
Purpose
This study aims to investigate the persistence ability of accounting variables, namely, abnormal earnings, book value, accruals and cash flows over a period of time and their valuation relevance in Indian scenario.
Design/methodology/approach
The study utilizes the generalized version of the Ohlson model which links market prices with abnormal earnings, book value and earning components (accruals and cash flows). Fixed-effect panel data regression is used to analyze six years of data on the sample units to determine the persistence and valuation relevance.
Findings
The findings provide evidence on the construct of persistence and value relevance of earnings and book value of equity in the Indian context. The findings further confirm that investors in India are fixated on earnings and fail to attend separately to the cash flow and accrual components of earnings while undertaking their investment decisions.
Practical implications
The empirical findings of the study will enable the analysts and investors to understand the relevance and persistence of accounting variables in case of an emerging market like India.
Originality/value
The study extends the extant literature on value relevance studies in developed markets to an emerging market like India and enriches it in several ways.
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Sees the objective of teaching financial management to be to helpmanagers and potential managers to make sensible investment andfinancing decisions. Acknowledges that financial…
Abstract
Sees the objective of teaching financial management to be to help managers and potential managers to make sensible investment and financing decisions. Acknowledges that financial theory teaches that investment and financing decisions should be based on cash flow and risk. Provides information on payback period; return on capital employed, earnings per share effect, working capital, profit planning, standard costing, financial statement planning and ratio analysis. Seeks to combine the practical rules of thumb of the traditionalists with the ideas of the financial theorists to form a balanced approach to practical financial management for MBA students, financial managers and undergraduates.
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This chapter advocates a teaching approach for the statement of cash flows (SCF) that includes introduction of the SCF early in the curriculum using the accounting equation…
Abstract
This chapter advocates a teaching approach for the statement of cash flows (SCF) that includes introduction of the SCF early in the curriculum using the accounting equation format, which helps students visualize the cash and accrual activities. We then adapt this accounting equation format to a worksheet model that can be used later in the curriculum with more complex data sets. This approach provides several advantages: (1) it maintains a consistent, accounting equation approach throughout; (2) it can be used for both the direct and the indirect report format; (3) when used with Excel, the format is easier to explain, easier to use, and less prone to mechanical error than the worksheet approaches used in most textbooks; and (4) it is used by many professional accountants.
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This study aims to examine whether accounting comparability between two firms, as measured by De Franco et al. (2011), reflects closeness in the amounts of cash flows and accruals…
Abstract
Purpose
This study aims to examine whether accounting comparability between two firms, as measured by De Franco et al. (2011), reflects closeness in the amounts of cash flows and accruals between the firms.
Design/methodology/approach
Using 278,452 pair-year observations over the years 2003–2019, the author evaluates the research question using regression models.
Findings
Closeness in cash flows and closeness in accruals both increase accounting comparability and the effect of closeness in cash flows is greater. The effect of closeness in earnings is greater than the combined effects of closeness in cash flows and accruals. Earnings quality strengthens, while product closeness weakens, the effects of closeness in earnings and closeness in cash flows.
Originality/value
To the best of the authors’ knowledge, this study is the first to empirically test the link between the closeness in earnings components and accounting comparability. This study is also the first to examine cash flows versus accruals in the context of accounting comparability.
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Dhiaa Shamki and Azhar Abdul Rahman
The paper aims to examine the influence of financial disclosure (FD) level and time on the value relevance of earnings, book value, and cash flows relative to three share price…
Abstract
Purpose
The paper aims to examine the influence of financial disclosure (FD) level and time on the value relevance of earnings, book value, and cash flows relative to three share price proxies, namely average annual share price, annual closing share price, and share price after a three-month period following the financial year-end for Jordanian companies.
Design/methodology/approach
The paper employs price model to examine the influence of FD level and time on the value relevance of three accounting variables relative to three share price proxies for 91 Jordanian companies (consisting of 5,460 observations) within 2004-2009.
Findings
Relative to three share price proxies, the findings proved that FD level and time have a significant influence on the value relevance of book value, but not for cash flows. Also, FD level and time have a significant influence on the value relevance of earnings relative to annual closing share price, while they are not relative to share price after a three-month period following the financial year-end. FD time has a significant influence on the value relevance of earnings relative to the average annual share price. Annual closing share price is the most reliable in indicating value relevance of accounting information.
Originality/value
The paper confirms that there is a shift away from earnings towards book value as the basis for firm valuation. Market participants might be able to conclude the firm value through the value relevance of accounting information influenced by company's FD.
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Kamran Ahmed, Muhammad Nurul Houqe, John Hillier and Steven Crockett
The purpose of this paper is to determine the properties of analysts’ cash flows from operations (CFO) forecast generated for Australian listed firms as a productive activity…
Abstract
Purpose
The purpose of this paper is to determine the properties of analysts’ cash flows from operations (CFO) forecast generated for Australian listed firms as a productive activity, within the wider processes of financial disclosure in Australia.
Design/methodology/approach
Two categories of criteria are adopted: first, basic predictive statistical performance relative to a benchmark model and earnings forecasts; and second, relevance for equity pricing, as indicated by the market reaction to cash flow or forecast error reactions. The final sample comprised 2,138 observations between 2001 and 2016 and several regression models are estimated to determine the relative performance and market reaction.
Findings
Analysts’ consensus cash flow forecasts demonstrate poor predictive performance relative to earnings forecasts. Cash flow forecasts are typically naïve extensions of earnings forecasts. Furthermore, cash flow forecasts appear to be of minimal use for equity market participants in complementing earnings forecasts’ role in informing firms’ equity pricing.
Practical implications
While analysts’ earnings forecasts are useful for making predictions, the role of analysts’ cash flow forecasts in capital market functional efficiency appears quite limited.
Originality/value
This study is one of few that examines comparative usefulness of analysts’ earnings and cash flow forecasts and their predictive power using the Australian setting. Additionally, it enriches the sparse international literature on such forecasts.
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This paper reports an attempt to design a free cash flow version of the cash flow statement. In specific, the paper relates the comprehensive income concept to the definition of…
Abstract
Purpose
This paper reports an attempt to design a free cash flow version of the cash flow statement. In specific, the paper relates the comprehensive income concept to the definition of free cash flows and shows how free cash flows and residual income can be calculated from the cash flow statement.
Design/methodology/approach
This paper exhibits how this different version of the cash flow statement can be reported by illustrating the differences with the form of the statement required by the regulatory accounting bodies.
Findings
This paper shows that the cash flows resulting from operating and investing activities are exactly equal to the cash flows received by debt and equity holders (financing activities) by using a simple definition of a company's free cash flow.
Practical implications
The method used requires a different version of a cash flow statement in which all financing related cash flows, such as interest expense is not included in the cash flow from operating activities. This version of the cash flow statement can be used in order to evaluate and appreciate financial policy formulation.
Originality/value
The paper provides to the shareholders and all the parties who are interested in firm and its operation (managers, lenders etc) with information about the company's ability to distribute dividends, to issue new debt and in general the company's ability to meet its obligations.
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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…
Abstract
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.
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