TAILIEUCHUNG - The relation between earnings and cash flows

A simple model of earnings, cash flows and accruals is developed by assuming a random walk sales process, variable and fixed costs, accounts receivable and payable, and inventory and applying the accounting process. The model implies earnings better predicts future operating cash flows than does current operating cash flows and the difference varies with the operating cash cycle. Also, the model is used to predict serial and crosscorrelations of each firm's series. The implications and predictions are tested on a 1337 firm sample over 1963-1992. Both earnings/cash flow forecast implications and correlation predictions are generally consistent with the data. We. | The relation between earnings and cash flows Patricia M. Dechow University of Michigan . Kothari Sloan School of Management Ross L. Watts William E. Simon Graduate School of Business Administration University of Rochester First draft October 1994 Current version September 1997 A simple model of earnings cash flows and accruals is developed by assuming a random walk sales process vanable and fixed costs accounts receivable and payable and inventory and applying the accounting process. The model implies earnings better predicts future operating cash flows than does current operating cash flows and the difference varies with the operating cash cycle. Also the model is used to predict serial and crosscorrelations of each firm s series. The implications and predictions are tested on a 1337 firm sample over 1963-1992. Both eamings cash flow forecast implications and correlation predictions are generally consistent with the data. Correspondence Ross L. Watts William E. Simon Graduate School of Business Administration University of Rochester Rochester NY 14627 716 275 4278 E-mail watts@ kothari@ We thank workshop participants at Cornell University University of Colorado at Boulder New York University University of North Carolina University of Quebec at Montreal and Stanford Summer camp for helpful comments . Kothari and Ross L. Watts acknowledge financial support from the Bradley Research Center at the Simon School University of Rochester and the John M. Olin Foundation. The relation between earnings and cash flows Ỉ. Introduction Earnings occupy a central position in accounting. It is accounting s summary measure of a firm s performance. Despite theoretical models that value cash flows accounting earnings is widely used in share valuation and to measure performance in management and debt contracts. Various explanations have been advanced to explain the prominence of accounting earnings and the reasons for its usage. An example is that .

• Kế toán - Kiểm toán
• Chromatography Equipped
• Headspace (GC–HS)
• Wine Technology
• Odorant Series
• Analytical Tool
• Biological Ageing
• Major Volatile
• Compounds Analysis
• Produced
• Mezcal Fermentation
• Chromatography
• Equipped Headspace