How Do Amounts, Composition, and Properties of Accruals Differ for Physical versus Knowledge Firms?

61 Pages Posted: 20 May 2022 Last revised: 27 Jul 2022

See all articles by Aneel Iqbal

Aneel Iqbal

Thunderbird School of Global Management, Arizona State University

Anup Srivastava

University of Calgary - Haskayne School of Business

Date Written: July 26, 2022

Abstract

The principles of accrual accounting took shape when most firms operated with physical assets and produced physical products (physical firms). The global economy in general, and the U.S. economy in particular, has shifted toward firms that function with intangible assets and sell knowledge-laden products or instantaneously produced services [knowledge firms; for example, Pfizer, Google, and Meta (Facebook)]. In this paper, we examine whether the amounts of accruals, their composition (components such as working capital, long-term, conditionally conservative, nonarticulating, and financial accruals), and their properties (alleviating timing difference between the occurrence of economic events and cash flows, as well as accruals’ ability to predict cash flows and earnings) differ for knowledge versus physical firms. We find that, as a percentage of assets and revenues, the absolute value of accruals is larger for knowledge firms than for physical firms. This pattern indicates that accounting for knowledge firms requires at least as much judgment and estimates as for physical firms. Meanwhile, accruals’ timing mitigating role is more prone to estimation errors for knowledge firms. Despite higher errors, knowledge firms’ accruals are as predictive of future earnings and cash flows as for physical firms, at least by the time knowledge firms become large and mature. Our study contributes to the ongoing debate on the changing usefulness of accrual accounting vis-à-vis cash accounting, as the composition of listed firms shifts toward knowledge firms. We show that accrual accounting remains prevalent and useful despite this shift.

Keywords: Accruals, Intangibles, Accounting Estimates; Earnings Quality, Timing Roles, Summary Measure

JEL Classification: M13; M41

Suggested Citation

Iqbal, Aneel and Srivastava, Anup, How Do Amounts, Composition, and Properties of Accruals Differ for Physical versus Knowledge Firms? (July 26, 2022). Available at SSRN: https://ssrn.com/abstract=4113474 or http://dx.doi.org/10.2139/ssrn.4113474

Aneel Iqbal (Contact Author)

Thunderbird School of Global Management, Arizona State University ( email )

One Global Place
401 North 1st Street
Phoenix, AZ 85004
United States

HOME PAGE: http://thunderbird.asu.edu/

Anup Srivastava

University of Calgary - Haskayne School of Business ( email )

2500 University Drive, NW
Calgary, Alberta T2N 1N4
Canada

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