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Discretionary Accruals and the Predictive Ability of Earnings in the Forecast of Future Cash Flows: Evidence from Australia
Corporate Ownership & Control / Volume 9, Issue 1, 2011, Continued - 6 DISCRETIONARY ACCRUALS AND THE PREDICTIVE ABILITY OF EARNINGS IN THE FORECAST OF FUTURE CASH FLOWS: EVIDENCE FROM AUSTRALIA Shadi Farshadfar*, Reza Monem** Abstract We examine whether discretionary and non-discretionary accruals improve the predictive ability of earnings for forecasting future cash flows in an Australian context. Using both within-sample and out- of-sample forecasting tests, we demonstrate that discretionary accruals improve the predictive abilty of earnings in the forecast of future cash flows. Further, discretionary and non-discretionary accruals and direct method cash flow components together are more useful than (i) aggregate earnings, (ii) aggregate cash flow from operations and total accruals, and (iii) aggregate cash flow from operations, discretionary accruals and nondiscretionary accruals. Keywords: Discretionary Accruals, Nondiscretionary Accruals, Cash Flow, Earnings, Future Cash Flows, Australia JEL Classification: M41 *Corresponding Author, Ted Rogers School of Management, Ryerson University, 350 Victoria Street, Toronto, ON, M5B 2K3, Canada Tel: 1-416-9795000 Fax: 1-416-9795266 Email: [email protected] ** Griffith Business School, Griffith University, Brisbane, Australia 1. Introduction discretionary and non-discretionary accruals, most of the previous studies have used stock returns as a We investigate whether decomposing accruals into surrogate of future cash flows, rather than using future discretionary and non-discretionary components cash flows directly. improves the predictive ability of earnings for The forecasting of future cash flows is forecasting future cash flows. There are two fundamental to a firm‘s valuation and its investment perspectives in positive accounting theory about the analysis (e.g., Krishnan and Largay, 2000); as well, role of discretionary accruals in the usefulness of accounting standard-setters argue that forecasting earnings: signaling and opportunism. -
Executive Stock Options and Dividend Policy
Executive Stock-Based Compensation and Firms’ Cash Payout: The Role of Shareholders’ Tax-Related Payout Preferences David Aboody Anderson Graduate School of Management University of California at Los Angeles Los Angeles, CA 90095 Tel: (310) 825-3393 [email protected] and Ron Kasznik Graduate School of Business Stanford University Stanford, CA 94305 Tel: (650) 725-9740 [email protected] March 2007 Under material revision David Aboody acknowledges the support of the Anderson School at UCLA. Ron Kasznik acknowledges the support of the Graduate School of Business, Stanford University. We appreciate the comments and suggestions by William Beaver, Jack Hughes, Brett Trueman, and workshop participants at the University of British Columbia, Harvard Business School, University of Minnesota, Ohio State University, and the Accounting Summer Camp at Stanford University. Executive Stock-Based Compensation and Firms’ Cash Payout: The Role of Shareholders’ Tax-Related Payout Preferences ABSTRACT This study investigates the extent to which the structure of executive stock-based compensation helps to align managers’ cash payout choices with shareholders’ tax-related payout preferences. Specifically, shareholders’ preferences between dividends, which are taxed as ordinary income, and stock repurchases, which can result in gains taxed as long-term capital gains, can depend on the relative magnitudes of their tax consequences. Similarly, to the extent that executives make payout choices that increase their compensation, stock options, which are not dividend-protected, can induce managers to favor repurchases over dividends as a form of payout. In contrast, compensation in the form of restricted stock, which is dividend-protected, is more likely to induce the use of dividends. -
Usefulness of Accounting Theory and Practices on Large Business Organizations in Nigeria
European Scientific Journal November 2018 edition Vol.14, No.31 ISSN: 1857 – 7881 (Print) e - ISSN 1857- 7431 Usefulness of Accounting Theory and Practices on Large Business Organizations in Nigeria Osho, Augustine E. PhD Akinola, Akinwumi O. Department of Accounting, Achievers University, Owo, Nigeria Doi:10.19044/esj.2018.v14n31p303 URL:http://dx.doi.org/10.19044/esj.2018.v14n31p303 Abstract The study was about the impact of accounting theory and practice on performance of large scale business in Nigeria. The objective of the study was to examine the effect and usefulness of accounting theory and practice on financial performance of large firms. The research was carried out, using Coscharis Group Limited as the case study. Primary Data was collected through simple random sampling and using self-administered questionnaires for 20 respondents. Secondary Data was gotten from the company's annual reports on return on equity for the period 2014-2016. The primary and secondary data were consolidated for analysis. Multiple Linear Regression was used to analyze the data to test for the relationship between the accounting theory and practice variables (Positive Accounting Theory(PAT), Financial Reporting(FR), Auditing Practice (AP) and Budgeting) and Financial Performance(Return on Equity). Findings revealed that accounting theory and practice have significant relationship with the financial performance of large companies in Nigeria. It further shows that variables of accounting practice have significant effect on financial performance of large firms in Nigeria. It is recommended that quoted and unquoted organizations should ensure there is consistency in the accounting theory and practice adopted in preparation of their records to enhance stability in their financial performance. -
Line-Item Analysis of Earnings Quality Contents
Foundations and TrendsR in Accounting Vol. 3, Nos. 2–3 (2008) 87–221 c 2009 N. D. Melumad and D. Nissim DOI: 10.1561/1400000010 Line-Item Analysis of Earnings Quality By Nahum D. Melumad and Doron Nissim Contents 1 Introduction 88 2 Overview of Earnings Quality 91 3 Overview of Earnings Management 96 4 Revenue 107 5 Accounts Receivable 124 6 Inventory 131 7 Property, Plant and Equipment 142 8 Intangible Assets 153 9 Investments in Debt Securities 160 10 Debt 164 11 Leases 168 12 Income Taxes 172 13 Pension and Other Post-Retirement Benefits 179 14 Contingencies 184 15 Other Liabilities 187 16 Derivatives 190 17 Investment in Equity Securities and Variable Interest Entities 195 18 Shareholders’ Equity 203 19 Concluding Comments 213 References 214 Foundations and TrendsR in Accounting Vol. 3, Nos. 2–3 (2008) 87–221 c 2009 N. D. Melumad and D. Nissim DOI: 10.1561/1400000010 Line-Item Analysis of Earnings Quality∗ Nahum D. Melumad1 and Doron Nissim2 1 Columbia Business School, Columbia University, New York, NY 10027, USA, [email protected] 2 Columbia Business School, Columbia University, New York, NY 10027, USA, [email protected] Abstract In this paper, we discuss earnings quality and the related concept of earnings management, focusing on the primary financial accounts. For each key line-item from the financial statements, we summarize accounting and economic considerations applicable to that item, dis- cuss implications for earnings quality, evaluate the susceptibility of the item to manipulation, and identify potential red flags. The red flags and specific issues discussed for the individual line-items provide a frame- work for fundamental and contextual analysis by academic researchers and practitioners. -
Accounting Consistency and Earnings Quality†
Accounting consistency and earnings quality† Kyle Peterson University of Oregon [email protected] Roy Schmardebeck University of Arkansas [email protected] T. Jeffrey Wilks Brigham Young University [email protected] August 2013 Abstract: We specify measures of accounting consistency based on the textual similarity of accounting policy footnotes both across time and within industry and we examine how these measures relate to earnings quality. Consistency over time is positively associated with earnings quality, as proxied by earnings persistence, predictability, smoothness, accrual quality, and absolute discretionary accruals. We also find a positive association between accounting consistency within industry and accrual quality and absolute discretionary accruals proxies, but this positive association stems from measurement error in the earnings quality proxies. Our results suggest that accounting consistency is an important factor in the measurement of earnings quality. JEL classification: M41 Keywords: accounting policies, comparability, consistency, earnings quality, accrual estimation, accrual quality † We appreciate the helpful comments of Bob Bowen, Cory Cassell, Michael Drake, Adam Esplin, Dave Folsom, Steve Matsunaga, Rick Mergenthaler, Ken Merkley, James Myers, Linda Myers, Gary Taylor, Jenny Tucker, Rodrigo Verdi, Peter Wilson, and workshop and conference participants at the Brigham Young University Accounting Symposium, the 2010 UBCOW Conference, the 2011 AAA Annual Meeting, and the University of Arkansas. 1. Introduction Earnings quality is a frequently studied, albeit elusive, construct in accounting research. The large surge of research on earnings quality has prompted some recent reflection about what earnings quality is and the importance of measurement in this research. Dechow et al. (2010) note that various proxies are used for earnings quality and that each of these proxies capture different aspects of quality. -
Financial Accounting & Reporting I
Financial Accounting & Reporting I Spring 2021 (ACCTNG3401-001) Syllabus About the Instructor Dr. Jennifer (He) Wen Phone:314-516-7187 Email: [email protected] Campus office: 210 Anheuser-Busch Hall Virtual Office Hours: Thursday 8-9pm or by appointment In-Person Office Hours: To be determined Welcome to ACCTNG 3401! This is a one semester course that advance your knowledge about financial accounting. You may have heard “Accounting is the language of business”. In this course, you will strengthen your mastery of the fundamental concepts of this language and the preparation process of financial statements. Building on your knowledge of the fundamentals, this course introduces you to in-depth discussion of financial accounting focusing on the perspective of preparers of financial reports. You will not only learn about the accounting methods for the accounting items covered this class and prepare the reporting of these items, but also analyze how different methods affect financial statements differently. Thus, this class will be the foundation for all your other upper- level accounting classes. Becoming a fluent speaker of a new language requires commitment of time and efforts. This course is very rigorous. You will want to devote a couple of blocks of time (8-9 hours in total per week) to read the material and complete online activities and homework. To optimize knowledge retention and your performance in the class, it is recommended that you study in a period of about a couple of hours each time for several days a week. Please avoid spending all the hours once in a week. To commit yourself to make time to study several times per week, it also requires a lot self-discipline. -
Regulatory Oversight and Reporting Incentives: Evidence from SEC Budget Allocations
Regulatory Oversight and Reporting Incentives: Evidence from SEC Budget Allocations Terrence Blackburne The Wharton School University of Pennsylvania 1300 Steinberg-Dietrich Hall Philadelphia, PA 19104 [email protected] November 2013 Abstract This study examines the determinants and consequences of regulatory oversight of corporate disclosures. I investigate the extent to which industry-level political activity influences the intensity of regulatory oversight, and whether variation in the intensity of oversight affects managers reporting incentives. I exploit variation in the allocation of budgetary resources between the SEC’s disclosure review offices as a source of variation in the oversight of financial reporting and disclosures. I find evidence of a significant relationship between industry-level political activity and visibility and the allocation of resources to each office. I then use the amount of budgetary resources allocated to each office as a proxy for the intensity of the SEC oversight that firms in a given industry face. I provide evidence that when SEC oversight is more intense managers report lower discretionary accruals, managers are less likely to issue financial reports that will be subsequently restated, and firms’ bid-ask spreads decrease. Overall, the results suggest that SEC oversight plays an important role in shaping managers’ reporting and disclosure incentives. I am deeply indebted to the members of my dissertation committee for their patient guidance and insightful comments: Wayne Guay, Luzi Hail, Chris Ittner, Cathy Schrand, and Dan Taylor. I also thank Jennifer Altamuro, Chris Armstrong, Karthik Balakrishnan, Paul Fischer, Nick Gonedes, Mirko Heinle, Bob Holthausen, John Robinson, Stephanie Sikes, and Ro Verrecchia for their thoughtful discussions. -
The Role of Accrual Accounting Basis in the Prediction of Future Cash Flows: the Nigerian Evidence
Research Journal of Finance and Accounting www.iiste.org ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online) Vol.6, No.4, 2015 The Role of Accrual Accounting Basis in the Prediction of Future Cash Flows: The Nigerian Evidence Oba Efayena Department of Accounting and Finance, Delta State University, P.M.B. 1, Abraka, Nigeria E-mail: [email protected] Abstract The study examines the role of past accrual based earnings derived from accrual accounting basis in comparison to cash flows in the prediction of future operating cash flows of quoted non-financial companies in Nigeria. Using a sample of 40 quoted non-financial companies in the Nigeria Stock Exchange, studied over a period of 13 years from 2001 – 2013, and employing the OLS regression technique, the results suggest that both past accrual based earnings and cash flows have predictive ability in forecasting future operating cash flows. The results show that cash flows are a better predictor of future operating cash flows than past earnings. Our findings do not support the assertion of the FASB (1978) and the IASB (1989) that earnings are a better predictor of future cash flows. The study recommends that the quality of accounting information produced by the accrual accounting basis should be improved upon by the urgent enforcement of international financial reporting standards (IFRS) in Nigeria. Keywords: past accrual based earnings; accrual accounting basis; cash flows; future operating cash flows; predictive ability; OLS regression 1. Introduction The two main approaches that have been used in predicting future cash flows are the accrual-basis accounting and the cash-basis accounting. -
Dividend Stickiness, Debt Covenants, and Earnings Management*
Dividend Stickiness, Debt Covenants, and Earnings Management* JAEWOO KIM, University of Rochester† KYEONG HUN LEE, Norwegian School of Economics ERIK LIE, University of Iowa ABSTRACT Consistent with the notion that dividends are very sticky, Daniel, Denis, and Naveen (2008) report evidence that firms manage earnings upward when pre-managed earnings are expected to fall short of dividend payments. However, we find that this evidence is not robust when controlling for firms’ tendency to manage earnings upward to avoid reporting earnings decli- nes; only firms with high leverage exhibit a statistically weak tendency to manage earnings to close deficits of pre-managed earnings relative to dividends. We further report that the deci- sion to cut dividends depends on whether reported earnings fall short of past dividends, but not on earnings management that eliminates a shortfall in pre-managed earnings relative to dividend payments. Overall, our evidence suggests that firms that face dividend constraints are more likely to cut dividends than to manage earnings to avoid dividend cuts. Persistance des dividendes, clauses restrictives et gestion du resultat RESUM E Conformement a la notion selon laquelle les dividendes sont tres persistants, Daniel, Denis et Naveen (2008) font etat de donnees indiquant que les societes gerent le resultat ala hausse lorsqu’elles s’attendent a ce que le resultat, prealablement gere, soit inferieur aux ver- sements de dividendes. Or, les auteurs constatent que ces donnees ne resistent pas au con- trole^ de la tendance des societes ag erer le resultat a la hausse pour eviter d’avoir a annoncer un flechissement des benefices; seules les societes qui ont un levier financier eleve affichent une tendance statistiquement faible ag erer le resultat afin de combler le deficit entre le resultat prealablement gere et les dividendes. -
Cash Flows and Earnings in Predicting Future Cash Flows: a Study of Deposit Money Banks in Nigeria
Advances in Research 15(1): 1-13, 2018; Article no.AIR.41226 ISSN: 2348-0394, NLM ID: 101666096 Cash Flows and Earnings in Predicting Future Cash Flows: A Study of Deposit Money Banks in Nigeria Adebimpe Otu Umoren1* and Nsima Umoffong1 1Department of Accounting, Faculty of Business Administration, University of Uyo, Nigeria. Authors’ contributions This work was carried out in collaboration between both authors. Author AOU designed the study, performed the statistical analysis and wrote the first draft of the manuscript. Author NU managed the literature searches and read and amended the first draft of the manuscript. Both authors read and approved the final manuscript. Article Information DOI: 10.9734/AIR/2018/41226 Editor(s): (1) Alyona Maksymets, Professor, Department of International Business Management, Ukrainian National Forestry University, Ukraine. Reviewers: (1) Victoria. K. Senibi, Covenant University, Nigeria. (2) Elżbieta Szczepankiewicz, Poznan University of Economics and Business, Poland. (3) Charles Ngome Eke, Federal Polytechnic Nekede, Nigeria. Complete Peer review History: http://www.sciencedomain.org/review-history/24698 Received 25th February 2018 Accepted 2nd May 2018 Original Research Article Published 19th May 2018 ABSTRACT The researchers examined the abilities of past cash flows and past earnings in predicting future operating cash flows of Nigerian Money deposit banks. Ex-post facto design was used in conducting the study while sampling 13 out of the 14 deposit money banks listed on the Nigerian Stock Exchange from 2011 to 2016. The study employed Descriptive statistics, Pearson correlation and OLS regression techniques; where key findings revealed that past earnings has ability in predicting future operating cash flows than past cash flows. -
Earnings Quality White Paper
Corporate Earnings: It’s not just a question of quantity September 30, 2007 Introduction outline the findings of our own research and illustrate They say beauty is only skin-deep. Investors would be how we have incorporated earnings quality analysis into wise to remember this aphorism when choosing stocks our investment process. since a company’s stated earnings, though eagerly watched by the market, are only ink-deep. To truly un- Background derstand a firm’s financial situation, it is important to The success Smith Group has achieved over the years consider the quality of a firm’s earnings, not just the is attributable to our ability to control portfolio risk and quantity. invest in companies whose earnings grow faster than the market expects. Because reported earnings are so The Basics... important to our process, and because managements have so many accounting tools available to them to Understanding the quality of earnings is important to forecasting the quantity and credibility of fu- manipulate earnings, it is important that we assess the ture earnings. credibility of earnings for every company we invest in our clients’ portfolios. Level of accruals, operating margins, asset turnover and expense exclusions are significant indicators of the degree of earnings quality. The foundations of our earnings quality model rest on a large array of research generated both externally and Earnings quality measures differ by industry, making internally. We have studied numerous academic papers customization of rankings models necessary. from some of the leading minds in the field. The out- Companies with high earnings quality have a come of this review was a confirmation of the primary higher likelihood of reporting positive earnings measures that we already use, but with some enhance- surprises in the future. -
Table 1 Is Extracted from Who Audits America 2000 and 2005 Data, Which Is Based on For-Profit Publicly Held Companies
Journal of Forensic & Investigative Accounting Vol. 1, Issue 1 Bernard Madoff and the Solo Auditor Red Flag Ross D. Fuerman* In hindsight, there were what Gregoriou and Lhabitant (2008) call a “riot of red flags” hinting that Bernard Madoff was committing fraud. First, the typical separation of duties was missing. A normal hedge fund uses an investment manager to manage the assets, a broker to execute trades, a fund administrator to calculate the net asset values, and a custodian to have custody of the assets. Often, each of these four is separate and independent from the others. It reduces the risk of fraud, just like separation of duties within a company enhances internal control and reduces the risk of fraud. The Madoff organization performed all four of these functions. Second, the fees charged by Madoff were unusual. Madoff charged no management or performance fee, just a market rate commission on each trade. This made it easy for feeder fund operators to charge a management fee of about 2% and a performance fee of about 20% and encouraged them to send as much investor funds to Madoff as they could. This also made them disinclined to let conscientious due diligence slow down the flow of funds. Third, the corporate governance of the Madoff organization was compromised by having all the key players be members of Madoff‟s family. His brother was the chief compliance officer. His nephew was the director of administration. His sons were directors. His niece was the general counsel and rules compliance attorney. * Dr. Fuerman is Associate Professor at Suffolk University.