Modelling the accruals process and assessing unexpected accruals*

CASH identity: C is cash flow from operations, I is cash flow to investments in operations, (C–I)
is widely known as the free cash flow, F represents the cash outflow for non-equity financing
activities, and D is cash outflow from equity-financing activities (it will be negative if there is a
net contribution from shareholders). This identity asserts that changes in cash on hand are
attributable to free cash flow plus (debt and equity) financing cash flow. It will be reduced to the
cash conservation equation in Penman (2009) if there is no change in cash on hand.
TWC identity: OIB is comprehensive operating income before depreciation and amortization.
TWC includes accounts receivable, inventory, accounts payable, deferred and accrued
components of accruals of other revenue and expenses that stem from day-to-day operations and
are due within and beyond twelve months. This relation asserts that total working capital is
increased by the amounts earned in OIB and reduced by net operating cash flow (C).
NCO identity: DA is depreciation and amortization expenses, which also include realized or
unrealized losses or gains in non-current operating assets. 2 NCO includes both (depreciable and
non-depreciable) tangible and intangible assets that stem from investments on operations. It is
increased by the purchase of new assets net of cash receipt from assets disposal (I) and it is
reduced by depreciation and assets‟ disposal net of asset revaluation (DA).
NOA identity: OI is comprehensive operating income. This identity is simply a combination of
TWC and NCO identities. It asserts that the change in NOA is increased by what is earned in OI
and what is purchased as assets during the period (I). However, they are reduced by the cash
2 Realised or unrealised gains or losses in these assets can be regarded as the reversal or the result of initial
measurement error in depreciation and amortisation expenses.
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