Identifying the Roles of Accounting Accruals in Corporate Financial Reporting

Journal of Accounting, Auditing, and Finance

39 Pages Posted: 5 Dec 2018 Last revised: 8 Nov 2021

See all articles by Sunil Dutta

Sunil Dutta

University of California, Berkeley - Haas School of Business

Panos N. Patatoukas

Berkeley Haas

Annika Yu Wang

University of Houston - Bauer College of Business

Date Written: September 10, 2017

Abstract

Research in corporate financial reporting identifies two important roles of accounting accruals. First, accruals smooth fluctuations in operating cash flows. Second, accruals allow recognition of losses in an asymmetric timely manner. While these two roles imply different relations between individual accrual components and operating cash flow news, prior research often focuses on the properties of aggregate accruals. We investigate the role of individual accrual components and identify asymmetry in the relation of investment with operating cash flow news as a confounding factor. We show that this investment factor operates through depreciation and amortization accruals, which typically account for the bulk of aggregate accruals. Overall, our paper demonstrates the importance of adopting a granular approach to identifying the different roles of individual accrual components.

Keywords: Accruals, Cash Flows, Smoothing, Asymmetric Timeliness, Investment, Working Capital

JEL Classification: M40, M41, G30, G31

Suggested Citation

Dutta, Sunil and Patatoukas, Panos N. and Wang, Annika Yu, Identifying the Roles of Accounting Accruals in Corporate Financial Reporting (September 10, 2017). Journal of Accounting, Auditing, and Finance, Available at SSRN: https://ssrn.com/abstract=3279895 or http://dx.doi.org/10.2139/ssrn.3279895

Sunil Dutta (Contact Author)

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States
510-643-1229 (Phone)
510-643-1412 (Fax)

Panos N. Patatoukas

Berkeley Haas ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

HOME PAGE: http://https://sites.google.com/berkeley.edu/panos

Annika Yu Wang

University of Houston - Bauer College of Business

Bauer College of Business
4750 Calhoun Road
Houston, TX 77204
United States

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