Modelling the accruals process and assessing unexpected accruals*

( CF ) and initiated deferred component ( CF ) are embedded in realized cash flow. They are
t i
t
t i
t
accruals that shift cash flow realized in period t out of income recognition in period t. In other
t t
words, accruals include both non-cash-related components in income ( CNI CNI ) and non-
titi titi income-related components in cash ( CF CF ); and this is summarized in Table 2.
t t
[Table 2 about here]
On one hand, the recognition of cash receipts (and payments) realized prior to and subsequent to
the supplies (and consumption) of goods and services in period t is shifted to income in period t.
On the other hand, the cash receipts (and payments) realized in period t for goods and services
supplied (and consumed) prior to and subsequent to period t are shifted out of income in period t.
This reinforces that the main role of accruals is to adjust cash flow to obtain income by shifting
cash flow recognition in income between periods (Statement of Financial Accounting Concept,
No. 1, Paragraph 44, Dechow 1994, and Dechow and Dichev 2002).
3.2 Modelling normal accruals
Normal accruals are the resulting accruals from the neutral accruals process that shifts cash flow
recognition (in and out of income) to the time at which it unbiasedly reflects firms‟ underlying
fundamentals, i.e., they are the „perfect foresight‟ accruals. The role of accruals in shifting cash
flow recognition in income implies that income during a period is made up of cash flows realized
in different periods. Essentially, the cash flow realized in period t and recognized in period t+i
(t–i) is the same as the income realized in period t and recognized in period t+i (t–i). Once the
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