Modelling the accruals process and assessing unexpected accruals*

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Table 1: Accounting Identity Item Identity or clean surplus relation CASH CASH CASH C I F D CSE NCO NFO t t1 t t t t t t1 t CSE CSE CNI Dt NCO NCO I DA t t1 t t t t1 t NFO NFO NFE Ft NOA t t1 t NOA NOA OI C I TWC t t1 t TWC TWC OIB Ct t t Table 1 summarizes the accounting identities for cash (CASH), net operating asset (NOA), total working capital (TWC), non-current operating asset (NCO), net financing liability (NFO), and common shareholder equity (CSE). C is the cash flow from operations, I is the cash flow to investments for operations, F represents the cash flow from non-equity financing activities, D is the cash outflow from equity-financing activities. OI is the comprehensive operating income. OIB is the comprehensive operating income before depreciation and amortization. DA is the comprehensive depreciation and amortization expenses. NFE is the comprehensive net financing expenses. CNI is comprehensive income 52
Table 2: Summary of Accruals Components Accrued Component (if t superscript is less than the t subscript, i.e., income recognition precedes cash flow realization) Deferred Component (if t superscript is more than the t subscript, i.e., income recognition supersedes cash flow realization) Initiation at period t (if either the t superscript or the t subscript has a “+” sign, i.e., an item is initiated in period t and reversed in period t+i) t CNIt i t i CFt Reversal at period t (if either the t superscript or the t subscript has a “-” sign, i.e., an item was initiated in period t-i and reversed in period t) t i CFt t CNIt i Table 2 summarizes the four accruals components depending on whether they are an accrued or deferred component or whether they are an initiation or reversal component. 53
Page 1 and 2: Modelling the accruals process and
Page 3 and 4: insights into what unexpected accru
Page 5 and 6: attributed to the firm‟s biased a
Page 7 and 8: 2 Direct and indirect method to cal
Page 9 and 10: flow associated with income recogni
Page 11 and 12: change in net financial obligations
Page 13 and 14: t t TACC CNICFt T t t t titti CNI
Page 15 and 16: period of income recognition and ca
Page 17 and 18: expenses or receive less revenue in
Page 19 and 20: any accounting distortions (conserv
Page 21 and 22: this paper). Combining the normal a
Page 23 and 24: 4 Assessing unexpected accruals mea
Page 25 and 26: firm j and the benchmark firms. The
Page 27 and 28: If there is no deviation in operati
Page 29 and 30: accruals is highly positive (negati
Page 31 and 32: These restrictions respectively imp
Page 33 and 34: The second source of contamination
Page 35 and 36: Even if the use of changes in cash
Page 37 and 38: The item m m CNI , 1 a a CNI
Page 39 and 40: Hence, to manage earnings downward
Page 41 and 42: 6 Conclusion My analysis reveals th
Page 43 and 44: References Ball, R., Shivakumar, L.
Page 45 and 46: Appendix 1: Derivation of Normal Ac
Page 47 and 48: accrued (initiated deferred) propor
Page 49 and 50: The portion of underlying income in
Page 51: Hence, the correlation between norm
Page 55 and 56: Table 4: Summary of the Bias in Une

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