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A NOTE ON THE RELATIONSHIP BETWEEN REPORTED CASH FLOW MEASURES, RATIOS AND THEIR ACCRUAL COUNTERPARTS
Author(s) -
Mitchell Jason D.,
Goh Steven W.,
Forman Stephen C.
Publication year - 1995
Publication title -
accounting and finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.645
H-Index - 49
eISSN - 1467-629X
pISSN - 0810-5391
DOI - 10.1111/j.1467-629x.1995.tb00275.x
Subject(s) - cash flow , cash flow statement , operating cash flow , cash flow forecasting , accrual , proxy (statistics) , context (archaeology) , earnings , econometrics , economics , business , actuarial science , finance , mathematics , statistics , paleontology , biology
This note focuses on information redundancy of cash flow measures reported in and financial ratios derived directly from Cash Flow Statements. Previous research utilised recomputed, “traditional” and “refined”, measures to proxy for cash flow. Comovements are derived amongst various earnings and cash flow key variable measures, select financial ratios and changes in financial ratios. Key variables' results support the notion that reported cash flows are correlated with funds flow and earnings. However, reported cash flows relative to funds flow are less correlated with most of their accrual based counterparts. Cash flows thus have potential to provide new and non‐redundant information relative to funds and accruals. Also, the incremental benefit of reported, relative to reconstructed cash flow measures is apparent. In light of the above, the merit of cash flow for the specific decision context of identifying suspended firms is investigated. Cash flow data in this context is found to be as useful as, but not superior to, comparable accruals data.