IDEAS home Printed from https://ideas.repec.org/a/ora/journl/v1y2011i2p597-602.html
   My bibliography  Save this article

Cash Flow Reporting And Creative Accounting

Author

Listed:
  • Negrea Laura Georgeta

    (-, Facultatea de Stiinte Economice si Gestiunea Afacerilor, Cluj-Napoca)

  • Matis Dumitru

    (Universitatea Babes-Bolyai, Facultatea de Stiinte Economice si Gestiunea Afacerilor, Cluj-Napoca)

  • Mustata V. Razvan

    (Universitatea Babes-Bolyai, Facultatea de Stiinte Economice si Gestiunea Afacerilor, Cluj-Napoca)

Abstract

Within the wide field of creative accounting, the main preoccupation of researchers surrounded earnings management. The current study comes to acknowledge that creative cash flow may distort the assessment of financial performance and should therefore, become a subject of the same interest for analysts and investors, as earnings management is. In order to reach the objective proposed, there are two hypotheses formulated, to be validated within the research: H1: Creative accounting distorts cash flow reporting within the boundaries of current regulations. H2: Real activity manipulation alters significantly the operating cash flow. The steps followed were analyzing the accounting standard related to cash flow statement, IAS 7, in order to uncover issues not taken into account, or options of allocation provided for accountants, which could lead to opportunistic choices and lack of comparability. The relevant literature was reviewed, so as to identify the opinions of accounting and finance specialists related to this subject, the results of their scientific process. The final step was a synthesis of relevant results and observations, which lead to the acceptance of the hypothesis of the research. Moreover, several techniques were identified, both related to creative accounting and to real activity manipulation, influencing mainly the figure reflecting operating cash flow, and thus the image on the potential of business continuity. Main conclusions were that the techniques applied were within the limits set by the standard: opportunistic allocation of dividends and interest collected or paid misallocation of certain activities like sale of receivables, but mainly recording non-recurring events into the operating cash flow, without separate notes of information or adjustments. Real activity manipulation should also be considered as it is even more difficult to detect, unless analysis is also performed on notes to financial reports and the figures within the profit and loss account. The contribution of the current study is providing a synthetic arrgumentation to why cash flow should be analysed in the context of creative accounting, reviewing methods and techniques that distort significantly the results of operating activity, providing basis for further study related to the impact of such practices on forecasts of cash flow and predictability of bankruptcy.

Suggested Citation

  • Negrea Laura Georgeta & Matis Dumitru & Mustata V. Razvan, 2011. "Cash Flow Reporting And Creative Accounting," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 1(2), pages 597-602, December.
    • Handle: RePEc:ora:journl:v:1:y:2011:i:2:p:597-602
    as

    Download full text from publisher

    File URL: http://anale.steconomiceuoradea.ro/volume/2011/n2/084.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Divesh S. Sharma & Errol R. Iselin, 2003. "The Relative Relevance of Cash Flow and Accrual Information for Solvency Assessments: A Multi-Method Approach," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 30, pages 1115-1140.
    2. Fernandez, Pablo, 2006. "Cash flow is cash and is a fact. Net income is just an opinion," IESE Research Papers D/629, IESE Business School.
    3. Hugo Nurnberg, 2006. "The distorting effects of acquisitions and dispositions on net operating cash flow," Accounting Forum, Taylor & Francis Journals, vol. 30(3), pages 209-226, September.
    4. Ali Al‐Attar & Simon Hussain, 2004. "Corporate Data and Future Cash Flows," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 31(7‐8), pages 861-903, September.
    5. Ali Al-Attar & Simon Hussain, 2004. "Corporate Data and Future Cash Flows," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 31(7-8), pages 861-903.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Comporek Michał, 2019. "The Use of Operational Cash Flow in the Estimation of Accrual-Based Earnings Management," Financial Sciences. Nauki o Finansach, Sciendo, vol. 24(2), pages 46-60, June.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Macías, Marta & Muiño, Flora, 2011. "Examining dual accounting systems in Europe," The International Journal of Accounting, Elsevier, vol. 46(1), pages 51-78, March.
    2. Noury, Benjamin & Hammami, Helmi & Ousama, A.A. & Zeitun, Rami, 2020. "The prediction of future cash flows based on operating cash flows, earnings and accruals in the French context," Journal of Behavioral and Experimental Finance, Elsevier, vol. 28(C).
    3. Akbar, Saeed & Shah, Syed Zulfiqar Ali & Stark, Andrew W., 2011. "The value relevance of cash flows, current accruals, and non-current accruals in the UK," International Review of Financial Analysis, Elsevier, vol. 20(5), pages 311-319.
    4. Joseph Akadeagre Agana & Kwame Mireku & Kingsley Opoku Appiah, 2015. "Comparative Predictive Abilities of Earnings and Operating Cash Flows on Future Cash Flows: Empirical Evidence from Ghana," Accounting and Finance Research, Sciedu Press, vol. 4(3), pages 1-40, August.
    5. Mwila Joseph Mulenga & Meena Bhatia, 2017. "The Review of Literature on the Role of Earnings, Cash Flows and Accruals in Predicting of Future Cash Flow," Accounting and Finance Research, Sciedu Press, vol. 6(2), pages 1-59, May.
    6. Nikola Petrovic & Stuart Manson & Jerry Coakley, 2009. "Does Volatility Improve UK Earnings Forecasts?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(9‐10), pages 1148-1179, November.
    7. Jaehong Lee & Eunsoo Kim, 2019. "Foreign Monitoring and Predictability of Future Cash Flow," Sustainability, MDPI, vol. 11(18), pages 1-22, September.
    8. Laswad, Fawzi & Baskerville, Rachel F., 2007. "An analysis of the value of cash flow statements of New Zealand pension schemes," The British Accounting Review, Elsevier, vol. 39(4), pages 347-355.
    9. Mattia Iotti & Giuseppe Bonazzi, 2016. "Assessment of Biogas Plant Firms by Application of Annual Accounts and Financial Data Analysis Approach," Energies, MDPI, vol. 9(9), pages 1-19, September.
    10. Dhyaa Abdulrazaq Abduljabar Al-Laban* & Abbas Naser Saadoon Almshabbk & Wissam Abdulkadhum Abdulridha, 2018. "The Role of Dividend Payout in the Determination of the Relationship Between Earnings Before Interest and Tax Cash Flow From Operations, Capital Expenditures and Firm Sustainable Cash Flows: A Case O," The Journal of Social Sciences Research, Academic Research Publishing Group, pages 382-390:5.
    11. Laura Arnedo & Fermín Lizarraga & Santiago Sánchez, 2012. "The role of accounting accruals for the prediction of future cash flows: evidence from Spain," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 3(4), pages 499-520, December.
    12. De Andrés Fazio, Salvador & Urquía Grande, Elena & Pérez Estébanez, Raquel, 2022. "The “secret life” of the Statement of Cash Flow: A bibliometric analysis," Cuadernos de Gestión, Universidad del País Vasco - Instituto de Economía Aplicada a la Empresa (IEAE).
    13. Akbar Jelodari & Fatemeh Asadi Kordshouli, 2016. "A Survey of the Role of Earnings Quality in Accurately Forecasting of Operational and Cash Circulation of Companies Listed on Tehran Stock Exchange," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 6(4), pages 82-89, October.
    14. Ali, Mazhar, 2015. "Impact of Operating Cash Flows on Capital Spending and Dividends," MPRA Paper 116415, University Library of Munich, Germany, revised 19 Oct 2022.
    15. Colin Clubb & Guoli Wu, 2014. "Earnings Volatility and Earnings Prediction: Analysis and UK Evidence," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 41(1-2), pages 53-72, January.
    16. Abdallah K. Atieh & Abdulrazzak K. Alshehadeh & Mohammed L. Ashour, 2020. "The Relationship between Both Accounting Earnings and Cash Flows, and Cash Dividends for Commercial Banks Operating in Jordan," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(4), pages 253-269.
    17. Ion Madalina Viorica, 2018. "Factors of enterprise value - the privatization of ‘Sidex Galati’ Romania (case study)," Proceedings of the International Conference on Business Excellence, Sciendo, vol. 12(1), pages 466-475, May.
    18. Balcaen, Sofie & Ooghe, Hubert, 2006. "35 years of studies on business failure: an overview of the classic statistical methodologies and their related problems," The British Accounting Review, Elsevier, vol. 38(1), pages 63-93.
    19. Palea, Vera & Scagnelli, Simone Domenico, 2014. "Do Earnings Reported under IFRS Improve the Prediction of Future Cash Flows? Evidence From European Banks," Department of Economics and Statistics Cognetti de Martiis. Working Papers 201443, University of Turin.
    20. Nikola Petrovic & Stuart Manson & Jerry Coakley, 2009. "Does Volatility Improve UK Earnings Forecasts?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(9‐10), pages 1148-1179, November.

    More about this item

    Keywords

    operating cash flow; creative accounting; non-recurring activity; IAS 7; financial performance;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ora:journl:v:1:y:2011:i:2:p:597-602. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catalin ZMOLE (email available below). General contact details of provider: https://edirc.repec.org/data/feoraro.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.