Study On Accruals’ Quality

As one of the most important financial indicators in the financial statements, accounting earnings can not only represent the results of company operations for a certain period of time, but also predict the trend of company’s future development. The quality of accounting earnings is the foundation of making decisions for information users. In recent researches, persistence of earnings has been widely used, which is one of the measures of the quality of earnings information. Different components of earnings are in different persistence, which can have different effects upon making decisions for information users. Therefore, identifying these differences is critical for information users.On the basis of dividing earnings into cash flows and total accruals in accordance with their properties, this study has divided total accruals into six parts further, which are operating receivables, inventories, operating payables, depreciations, amortizations and other accruals. For examining the incremental information of the six parts in forecasting future earnings and future cash flows, this study has built the extended Sloan (1996) models and the extended DKW model (2001). The empirical results show that:compared to the total accruals, the formations of total accruals can provide incremental information in forecasting future earnings and future cash flows, and the incremental explanatory ability is statistically significant in the prediction of future cash flows.Since the company was required to disclose statement of cash flows in1998, policies of financial statement presentation have been changed or reformed constantly, not only for the convergence with international standards but also for providing more useful information to the users. In2004, FASB and IASB launched a joint project called "Financial Statement Presentation" and released "Financial Statement Presentation Staff draft of an exposure draft (SD)" in July2010, whose goal is to increase comparability, understandability and relevance of financial information by the reclassification of financial statement presentation. In an innovative way, this study used the Vuong test results (comparison of different models’ explanatory abilities) to analyze the correlation between balance sheet, income statement and statement of cash flows. The results show that:the reform of financial statement presentation has been effective during the past decades in China, which has been greatly affected by the supplementary information of statement of cash flows disclosed in the notes——statement of cash flows prepared with indirect method has significantly enhanced the correlation between balance sheet and statement of cash flows. In addition, the Vuong test results also indicate that the reclassification of financial statement presentation in SD couldn’t effectively enhance the relationship of financial statements in China at present——it couldn’t significantly increase the useful of financial information.