Modelling the accruals process and assessing unexpected accruals*

esult, unexpected accruals measures from the modified version of the DD model are superior to
those from the encompassing model, and the degree of superiority depends on the extent that to
which measurement errors in revenue are greater than measurement errors in cash flow in
measuring their respective underlying items.
4.3 Jones model
To derive the Jones model, one can first re-parameterize the encompassing model in (11) as
where
WC DA REV REV REV
t t u, t u, t1 u, t1
j j 0, t 1, t j 2, t j 3, t j
NCO NCO
u, t1 u, t
4, t j 5, t j t, j
,
1, t 1, t
,
2, t 1, t 2, t
3, t 1, t 2, t 3, t
This model is econometrically identical to the encompassing model in (11) but with different
combinations of parameters being estimated (Bewley 1979). 18 If one imposes the following
restrictions 2, t 1,
t
where
, 3, 0
t , and 5, t 0
, model (15) will be reduced to
t t u, t u, t1
WC DA REV NCO
j j 0, t 1, t j 4, t j t, j
(15)
(16)
REV NCO
(17)
u, t1 u, t1
t, j 0, t, j 0, t 1, t, j 1, t j 4, t, j 4, t j
This model is commonly referred to as the Jones model, as it was originally employed in Jones
(1991) to extract unexpected accruals to test the extent of downward income management during
import relief investigations. It is simply a version of the encompassing model in (11) with
restrictions 2, t 1,
t
, 3, 0
t , and 5, t 0
.
18 This is only one possible transformation, and there are other possible transformations.
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