The Changing Landscape of Accrual Accounting

55 Pages Posted: 30 Nov 2015

See all articles by Robert M. Bushman

Robert M. Bushman

University of North Carolina Kenan-Flagler Business School

Alina Lerman

University of Connecticut - Department of Accounting

Frank Zhang

Yale School of Management

Multiple version iconThere are 3 versions of this paper

Date Written: November 28, 2015

Abstract

A fundamental property of accrual accounting is to smooth temporary timing fluctuations in operating cash flows, indicating an inherent negative correlation between accruals and cash flows. We show that the overall correlation between accruals and cash flows has dramatically declined in magnitude over the past half century and has largely disappeared in more recent years. The adjusted R2 from regressing (changes in) accruals on (changes in) cash flows drops from about 70% (90%) in the 1960s to near zero (under 20%) in more recent years. In exploring potential reasons for the observed attenuation, we find that increases in non-timing-related accrual recognition, as proxied by one-time and non-operating items and the frequency of loss firm-years, explain the majority of the overall decline. On the other hand, temporal changes in the matching between revenues and expenses, and the growth of intangible-intensive industries play only a limited role in explaining the observed attenuation. Lastly, the relative decline of the timing role of accruals does not appear to be associated with an increase in the asymmetrically timely loss recognition role.

Keywords: accrual accounting, accruals, cash flows, earnings management, accrual quality

JEL Classification: M40, M41, G12, G14

Suggested Citation

Bushman, Robert M. and Lerman, Alina and Zhang, Frank, The Changing Landscape of Accrual Accounting (November 28, 2015). Journal of Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2696498

Robert M. Bushman

University of North Carolina Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
919-962-9809 (Phone)

HOME PAGE: http://public.kenan-flagler.unc.edu/faculty/bushmanr/

Alina Lerman

University of Connecticut - Department of Accounting ( email )

School of Business
Storrs, CT 06269-2041
United States

Frank Zhang (Contact Author)

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

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