Comparative evaluation of the stability coefficient of different aspects of accrual items with the cash flow stability coefficient

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    Dissertation for Master's degree

    Accounting discipline

    Abstract

    Accepted accounting principles have a lot of flexibility in some methods, which potentially makes managers make accounting estimates based on their personal judgments. This flexibility may affect the reliability of accrual items and consequently the stability of these items in successive periods. The main purpose of this research is to compare the stability of accruals with the stability of cash flows and to investigate the reaction of investors to it in companies admitted to the Tehran stock market. The research method is descriptive and correlational, and research hypotheses were tested through multiple regression models. The research sample number is 120 companies, whose data for the years 2006 to 2011 were subjected to statistical analysis.  The findings of the hypothesis test show that the stability coefficient of accrual items of current accounting profit is lower than the stability coefficient of cash flow. At the same time, according to the results, the stability coefficient of accrual items of current operating profit is also lower than the stability coefficient of cash flow. In other words, the cash flow in the financial reports of the statistical sample companies has been more stable. This finding indicates that accruals in financial reports of companies are not stable and are probably affected by managers' reporting strategies. In addition, the results show that there is a difference between the stability factor of financial accruals and the stability factor of cash flow. In this way, it can be concluded that the cash flow, due to the real nature of these flows, is potentially stable.

    Chapter 1

    General Research

    1-1) Introduction

    Investors try to estimate future profits and future cash flows according to the reported profit. Therefore, net profit should be able to help investors in this direction. The reason for the need to pay attention to the quality of accruals as one of the quality characteristics of profit is that the constituent components of accruals have an information load. An increase in profit that is accompanied by high accruals indicates a low quality of profit and will lead to low future returns. Therefore, the quality of profit accruals has an effect on companies' stock returns. Considering that investors are looking for returns, they should adjust their expected returns to the quality of accruals. From the point of view of the investing company, the quality of accruals is related to the cost of common stock capital. Companies that seek to reduce their cost of capital should try to keep the quality of their accruals at a desirable level. Managers of such companies should avoid profit manipulation and understatement and overstatement of accruals (Kassi [1], 2011).

    In order to help make correct and timely decisions, financial statements provide valuable information to investors and other users of financial information. One of these valuable information is accounting estimates. Accounting estimates and forecasts improve the relevance of financial information and investors' perspective of inside information, hence are potentially useful to investors. But it should be kept in mind that accounting estimates that are reflected in accrual items; It is prepared by managers and its quality can be influenced by their self-interested and opportunistic motives. Applying the manager's opinion on the reported figures is due to the optionality of some financial reporting procedures. In this way, the management has some authority in identifying accrual items. These powers may be used to signal private information or be used opportunistically for profit management (Badercher et al. [2], 2011). Therefore, the importance of financial information from the perspective of investors is that this information is potentially useful for predicting the future trend of the situation, financial performance and future cash flows of companies.Meanwhile, some of the procedures applied by managers in financial reporting may distort users and reduce the predictive value of information. In such a situation, it is possible that the reaction of investors to the published information is compared to the case where the information does not have a significant deviation;  It is different that forming the expected return for shareholders based on such information increases the investment risk. Therefore, the research on the quality of accruals and its relationship with cash flows is one of the subjects that is of significant interest to researchers. The subject of the present research is the comparative evaluation of the stability of accruals with the stability of cash flows and the investigation of investors' reactions to it in companies admitted to the Tehran stock market. In this chapter, the main problem and the necessity of conducting the research is stated. In the following, the desired hypotheses are presented in order to examine the relationship between the variables, and the statistical population under study and the scope of the research are also explained. Finally, the keywords of the research are defined and presented operationally.

    1-2) Statement of the problem

    Accounting profit is one of the most important figures reported by companies from the point of view of users of financial information. Previous theoretical and empirical evidences consider this figure to consist of two cash and accrual parts. In this regard, cash flows result from real events and are reliably validated by the auditor's approval. In contrast, some components of accruals require managers' personal judgments and their validity potentially depends on these judgments (such as accounts receivable, depreciation, and contingent liabilities). This may cause deviations in accounting estimates and potentially affect the reliability of the reported figures (Piot [3], 2008). Therefore, in addition to net profit, accrual items should also be taken into account, and the adjustment of net profit or its breakdown becomes important to reflect the quality of accrual items. Accrual items represent the difference between accounting profit and cash related to it, which includes changes in inventory, accounts receivable and account previous studies show that the accrual component of profit (optional and non-optional accrual items) is as important as operating cash flow for users of financial statements (Natarjan [4], 1996). Therefore, the existence of reliable and valid information is potentially important in the analysis of reported accounting figures. The Financial Accounting Board considers reliability as the basic quality of financial reporting and states that the reliability of information means that the users are convinced that the reported information about operational events and the company's status is consistent with the available facts and is reliably free of deviations and errors. From this point of view, the deviations caused by personal judgments in the estimation of accruals potentially affect the reliability of the reported figures. This shows that the accrual component of profit is more affected by unstable events than its cash component, to the extent that the response coefficient of the accrual component of profit is significantly lower than the response coefficient of its cash component (Chariton et al. [5], 2001). Richardson et al. (2005) showed that the increase in deviation in the measurement of accruals causes a deviation in the stability coefficient of accruals compared to the stability coefficient of cash flow. Also, the accepted principles of accounting have a lot of flexibility in some methods, which potentially makes managers make accounting estimates based on their personal judgments. This flexibility may affect the reliability of accrual items and consequently the stability of these items in successive periods (Bobkari [6], 2012). Based on this, the main problem of the current research is to pay attention to the stability of accrual items and its components in order to analyze the reliability of these items and compare it with the stability of cash flows of statistical sample companies. Also, the estimation of capital market actors regarding the level of stability of accruals and their behavior in the future adjustments of their expectations is considered. Therefore, the main research question is stated as follows.

  • Contents & References of Comparative evaluation of the stability coefficient of different aspects of accrual items with the cash flow stability coefficient

    List:

    Table of Contents

    Page Title

    Abstract

    1

    Chapter One: Research Overview

    1-1) Introduction

    3

    1-2) Statement of the Problem

    5

    1-3) Importance and Necessity of Research

    7

    1-4) research objectives

    8

    1-5) research assumptions

    8

    1-6) research scope

    9

    1-6-1) research subject area

    9

    1-6-2) research time scope

    10

    1-6-3) research area

    10

    1-7) definition of research vocabulary

    10

    Chapter two: theoretical foundations and research background

    2-1) introduction

    13

    2-2) theoretical foundations

    14

    2-2-1) speech First: accrual items of accounting profit

    14

    2-2-1-1) accrual accounting

    14

    2-2-1-2) concept of accrual items

    15

    2-2-1-3) importance of accrual items of accounting profit

    16

    2-2-1-4) items Accrual of accounting profit and the role of these items in financial reporting

    17

    2-2-1-5) Quality of accrual items

    20

    2-2-1-6) Accrual of accounting profit and their role in the expected return of shareholders

    21

    2-2-3) Second speech: Stability coefficient of accrual items

    23

    2-2-3-1) The relationship between accruals and stock returns

    23

    2-2-3-2) The coefficient of sustainability of accruals and its consequences

    24

    2-2-3-3) The relationship of sustainability of accruals and future profits

    26

    2-2-3-4) Information benefits of accrual accounting profit

    26

    2-2-3-5) Accrual accounting profit items and their role in the normative response of the capital market

    29

    2-2-4) The third discussion: cash flow stability coefficient

    30

    2-2-4-1) Cash and framework Theoretical

    30

    2-2-4-2) Moving towards cash flows

    32

    2-2-4-3) Importance of cash flows

    34

    2-2-4-4) Cash flows resulting from operations and its importance in profit-making units

    35

    2-2-4-5) The importance of cash flows and financial reporting 38 2-2-4-6 The importance of cash flows in identifying financial events of economic units Profit-making units

    42

    2-2-4-9) Relation between cash and profit

    43

    2-2-4-10) Relation between accounting goals and cash

    44

    2-2-5) Fourth speech: profit and future profit forecast

    45

    2-2-5-1) Forecast Profit and users of profit forecasting

    45

    2-2-5-2) Benefits of profit forecasting for investors

    47

    2-2-5-3) Accounting information and their predictability

    48

    2-2-5-4) Profit (accounting quality) as a means of forecasting

    50

    2-2-5-5) Ability to predict profit

    50

    2-2-5-6) Usefulness of accounting figures in predicting future events

    52

    2-2-5-7) Forecasting profit by analysts

    54

    2-2-5-8) Forecasting profit by managers

    54

    2-2-6) Fifth speech: Investors and their reactions

    59

    2-2-6-1) Market reaction to the information related to the reported profit

    59

    2-2-6-2) Reasons for different market reactions

    60

    2-2-6-3) Investors' reaction to changes in items Accrual

    71

    2-2-6-4) Investors' reaction to accrual items against the rule

    72

    2-2-6-5) Reasons for abnormal reactions of investors based on accrual items

    73

    2-2-7) Sixth discussion: The relationship between the basic variables of research based on theoretical research

    75

    2-2-8) Seventh speech: research background

    76

    2-2-8-1) Researches conducted abroad

    76

    2-2-8-2) Researches conducted inside the country

    83

    2-2-9) Summary of research results

    86

    2-2-10) Summary of the chapter and the theoretical basis of the relationship between variables

    86

    Chapter three: research methodology

    3-1) Introduction

    91

    3-2) MethodResearch

    91

    3-3) Research statistical community

    92

    3-4) Statistical sample size

    92

    3-5) Research hypotheses

    93

    3-6) Data collection method

    94

    3-7) Definition of research variables and how to calculate They

    94

    3-7-1) research dependent variables

    95

    3-7-2) research independent variables

    96

    3-8) hypothesis model

    97

    3-8-1) first hypothesis model

    97

    3-8-2) Second to fourth hypothesis model

    99

    3-9) Statistical function (examiner criterion)

    100

    3-9-1) Descriptive data analysis

    100

    3-9-2) Advantages of using panel data

    100

    3-9-3) Limer's F test (Fisher's statistic)

    102

    3-9-4) Fixed or random effects test (Hausman test)

    103

    3-9-5) Durbin-Watson (DW) test

    104

    3-9-6) Pearson correlation coefficient

    106

    3-9-7) Regression models

    107

    3-9-8) Basic assumptions of regression

    108

    3-9-9) Significance test for regression equation

    109

    3-9-10) Significance test of coefficients

    109 Chapter 4: Data analysis and findings

    4-4) Correlation between research variables

    114

    4-5) Inferential statistics

    116

    4-5-1) Test of the first research hypothesis

    116

    4-5-2) Test of the second to fourth research hypotheses

    119

    4-5-2-1) Interpretation of the results of the test of the second hypothesis of the research

    121

    4-5-2-2) Interpretation of the results of the test of the third hypothesis of the research

    122

    4-5-2-3) Interpretation of the results of the test of the fourth hypothesis of the research

    122

    Chapter five: conclusions and suggestions

    5-1) Introduction

    125

    5-2) Results from hypotheses

    125

    5-2-1) First hypothesis test result

    125

    5-2-2) Second hypothesis test result

    127

    5-2-3) The result of the third hypothesis test

    128

    5-2-4) The result of the fourth hypothesis test

    129

    5-3) Suggestions from the research results

    130

    5-3-1) Practical suggestions

    130

    5-3-2) Suggestions for future research

    132

    5-4) Limitations of the research

    132

    Sources and reference

    134

    Source:

     

     

    Persian sources and reference

    Azad. Mohammad ( 1378); "Informational content of corporate profit forecasting", master's thesis. Faculty of Accounting and Coding, Allameh Tabatabai University.

    Ezdinia, Naser and Seyed Yaser Nazarzadeh (2008). Examining the relationship between profit quality and stock returns in companies listed on the Tehran Stock Exchange, Sayer, Development and Capital Magazine of Shahid University, Kerman Art and Accounting Association of Iran

    Ismaili, S. (2018) "Relationship between profit quality and profit" master's thesis, Shahid Beheshti University

    Tehrani, Reza and Reza Hesarzadeh (2018) The effects of free cash flows and restrictions on financing on over-investment and under-capitalization Accounting Research, No. 3, Tehrani, Reza, "Financial Management", Negah Danesh Publications, Tehran, 2004) Thaghafi, Ali; Kurdestani, Gholamreza (2013) Investigating and explaining the relationship between profit quality and market reaction to changes in cash profit, Accounting and Auditing Quarterly, No. 37, Khajavi, Shokrallah and Nazimi, Amin (2013) Investigating the relationship between profit quality and stock returns with an emphasis on the role of accrual figures in Tehran Stock Exchange. Accounting and auditing reviews. No. 40. pp. 37-60

    Haji Ebrahimi, Rahim, 2007, "Investigation of the effect of profit smoothing on the information content of profits of companies listed on the Tehran Stock Exchange", Master's Thesis, School of Management, University of Tehran. Master's degree, Faculty of Management, University of Tehran.

Comparative evaluation of the stability coefficient of different aspects of accrual items with the cash flow stability coefficient