Discretionary Accounting and Predictive Ability †MyAssignmenthelp

Question: Discuss about the Discretionary Accounting and Predictive Ability. Answer: Introduction: Cash flows have been a tremendously important component of accounting since the beginning of utilization of the particular subject. The capability of a company to generate revenues in the form of cash flows is a major factor in the decision making process of a particular stakeholder. A particular stakeholder or investor comes to know about the future proceedings of business of a particular company or the liquidity position and future in terms of revenue generation of a particular company by the forecasts of future cash flows. The Australian Accounting Standards Board (AASB) has mentioned in its accounting disclosures that it is very important for an entity to prepare cash flows as because it will help the particular entity as well as the investors to take economic decisions and will result in a clear and concise financial reporting (Bodie, Z., 2013). The method of cash flow is essentially based upon the idea that every event or transaction that takes place in a particular venture wil l be recorded at the exact time of their occurrence and then divided into different heads like investing activities and operating activities and financing activities (Hales and Orpurt 2012). Many experts are of the opinion that cash flow is the primary tool in the hands of accounting earning. But this is not completely supported by all as some experts are of the opinion that accounting accruals should never be used as a measuring tool of the performance of the company (Allen, Larson and Sloan 2013). They are primarily of the view that the cash flow system which technically identifies and puts forward the components of earnings involve a certain level of subjectivity which may be exploited by the managers in the form of discretionary accruals and give the managers a chance to gain personally at the expense of the company (Ball, Kothari and Nikolaev 2013). Therefore the issue that persists is the identification of the component that is most effective in estimating the accounting earnings or cash flows. Though some experts are of the opinion that both accounting earning and cash flows have the capacity to measure the future inflow of cash, others have either chosen cash flow or accounting earning as the right tool. The objective of this research proposal is to determine whether operating cash flows or accounting earning should be utilized in order to measure the future cash flows (Farshadfar and Monem 2013). (Badertscher, Collins and Lys 2012) are of the belief that cash flow from operating activities guarantees a better financial performance than the net profit incurred by a particular company. This is because of the fact that a cash flow from operating activities is less exposed to distorted handling than the net revenue generated by a particular company. (Farshadfar and Monem 2013) has also revealed that using the cash flows from operating activities has not only given a clearer picture as to what will be the estimate of future cash flows but also has reduced the chances to manipulate the earnings of a particular firm by its managers. This is because managers using cash flows from operating activities not only use them in order to hold back the investors but also to display the cash flow related to accruals which minimize the chances of exploitation or manipulation. (Call, Chen and Tong 2013) state that cash flows are mainly preferred by the CEOs. This is because of the fact that the positive results that are carried by a cash flow help to cover the negative results that are forecasted by the accounting earnings. Moreover when the case is such that the accounting earnings portrays a positive result then the cash flows are used to prove the credibility of such forecasts and lastly when the company runs through a growth phase in order to prove its economic viability cash flows are used. (Mohanram 2014) in his paper is also of the opinion that when financial analysts disclose accounting earnings along with cash flows, the accruals are exposed which reduce the chances of mispricing. (Goodman et al., 2013) in his paper has also observed that when accounting earnings are forecasted along with the cash flows from operating activities, the calculations seem to be more accurate by the financial analysts. The paper focuses on bringing forward a brand new approach to measure the nature of accounting results and accruals. This method is based upon the principle that high ac curacy in measuring accruals which needs a great degree of balance. However, the inaccuracy that may be committed increase the chance of manipulation. The results of the study display that the variations or differences in rotating funds are not positively related to cash flows from operating activities, and positively related to the cash flows from operating activities of the past and future. While estimating the returns of a particular company, both accounting earning and cash flow from operating activities are important. Cash flows from operating activities as recommended by the vast literature van be separately utilized in order to measure the financial position of a particular company because of the fact that it not only minimizes the chances of mispricing but also makes the statements of accounting earning more accurate. Therefore the following hypothesis is suggested. The ability of earnings to predict future operating cash flows is higher than the ability of past operating cash flows. Research Methodology The research methodology that is used in this particular research is survey. A number of companies are taken as samples in the research. Interviews of different CEOs are done in order to know their opinions as to whether the cash flow or accounting earning which is the more viable method for estimating the financial position or the financial condition of the company. A number of journals have also been considered for the purpose of the research. Several experts and financial analysts have also been interviewed in order to complete the research of the proposal. Referencing Badertscher, B.A., Collins, D.W. and Lys, T.Z., 2012. Discretionary accounting choices and the predictive ability of accruals with respect to future cash flows. Journal of Accounting and Economics, 53(1), pp.330-352. Farshadfar, S. and Monem, R., 2013. Further evidence on the usefulness of direct method cash flow components for forecasting future cash flows. The international journal of accounting, 48(1), pp.111-133. Call, A.C., Chen, S. and Tong, Y.H., 2013. Are analysts' cash flow forecasts nave extensions of their own earnings forecasts?. Contemporary Accounting Research, 30(2), pp.438-465. Mohanram, P.S., 2014. Analysts' cash flow forecasts and the decline of the accruals anomaly. Contemporary Accounting Research, 31(4), pp.1143-1170. Goodman, T.H., Neamtiu, M., Shroff, N. and White, H.D., 2013. Management forecast quality and capital investment decisions. Bodie, Z., 2013. Investments. McGraw-Hill. Ball, R., Kothari, S.P. and Nikolaev, V.V., 2013. Econometrics of the Basu asymmetric timeliness coefficient and accounting conservatism. Journal of Accounting Research, 51(5), pp.1071-1097. Farshadfar, S. and Monem, R., 2013. The usefulness of operating cash flow and accrual components in improving the predictive ability of earnings: a re?examination and extension. Accounting Finance, 53(4), pp.1061-1082. Hales, J. and Orpurt, S.F., 2012. A review of academic research on the reporting of cash flows from operations. Allen, E.J., Larson, C.R. and Sloan, R.G., 2013. Accrual reversals, earnings and stock returns. Journal of Accounting and Economics, 56(1), pp.113-129.