Identifying the Roles of Accounting Accruals in Corporate Financial Reporting

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