Showing papers on "Cash flow forecasting published in 1989"

Investment, Finacial Factors and Cash Flow: Evidence From UK Panel Data

Abstract: In this paper we provide some econometric evidence on the impact of financial factors like cash flow, debt and stock measures of liquidity on the investment decisions of U. K. firms. These variables are introduced via an extension of the Q model of investment which explicitly includes agency/financial distress costs. We discuss if the significance of cash flow may be due to the fact that it proxies for output or because it is a better measure of market fundamentals than Q. Moreover we investigate if the effect of financial factors varies across different types of firms, according to size, age, and type of industry (growing and declining). We analyze the determinants of the magnitude of the cash flow effect and explain why caution must be exercised in attributing inter-firm differences only to differences in the importance of agency or financial distress costs.

Information content of cash flow figures

Abstract: This paper investigates the link between earnings and share prices for a sample of UK companies for the years 1961 to 1977. Three measures of earnings were used: the traditional historical cost accounting return and two which were closer to cash flow measures. The strength of the link between earnings and cumulative abnormal returns was investigated relative to the level of inflation. The results indicate that, while there is substantial information content in the traditional historical cost rate of return, there is very little information conveyed by the measure closest to pure cash flow. No support was therefore found for the use of cash flow based reports. Evidence was found showing substantial changes in the nature of the relationship between accounting and stock returns, but this could not be explained by the effects of inflation.

Order Quantities with Temporary Price Reductions

Abstract: The temporary price-change problem is studied, in which the objective is to minimize discounted cash flows. As pointed out by Goyal in an earlier paper, only the cash transactions at purchase times (i.e. the payments for the goods and the ordering costs) were considered. The cash flows associated with `inventory maintenance' costs which occur more or less continuously over time were neglected, which changes the structure of the model. Examples of these costs include storage, insurance, record-keeping, deterioration and obsolescence costs. In this paper, these continuously generated cash flows are included in the analysis, thereby making the new model more applicable to practical situations. This model is of interest because order-quantity decisions often must be made under conditions of both temporary price reductions and/or imminent price increases. These changes occur frequently in practice.

Cash Flow Accounting and Liquidity: Cash Flow Potential and Wealth

Abstract: The persistence of a minority interest in ‘cash flow accounting’ alongside the dominant financial reporting pattern that gives cash flow statements a distinctly secondary role in the line-up of flow statements suggests that something is missing from the analyses of the interested parties. The major theme of this paper is that users rely on historical cash flow reporting for information relevant to projecting enterprise liquidity in the short run, and on financial statements based on accrual-deferral accounting for information relevant to their interest in wealth and income. An explicit distinction between the two accounting objectives (providing information for use in assessing future enterprise liquidity and providing information for use in assessing enterprise wealth and income and performance against investors' augmentation-of-wealth objective) is recommended as a basis for clarifying the issues. That distinction suggests the value of two quite different, but related, sets of data: historical ...

An Empirical Investigation of the Predictive Power of Accrual and Cash Flow Data in Forecasting Operating Cash Flow

Abstract: An Empirical Investigation Of The Predictive Power Of Accrual And Cash Flow Data In Forecasting Operating Cash Flow A primary objective of accounting information is to help financial statement users forecast the amounts, timing, and uncertainty of prospective cash inflows to the enterprise [8]. While the Financial Accounting Standard Board (FASB) has expressed the belief that accrual accounting information is more useful than cash flow information in assessing the future cash flow prospects of an enterprise [8, 9], only limited empirical evidence is available on the ability of accrual and cash flow data to predict future cash flows. In this paper, we address the issue of the relative information content (1) of facrual accounting and cash flow data with respect to the accuracy of cash flow forecasts. In addition, the possibly more important issue of whether a combination of accrual and cash flow data results in better predictions than utilizing only one data set is investigated. In so doing, the predictive information content of various components of accrual data (earnings, working capital, and sales) is examined. While security price research has traditionally been the most popular means of evaluating the information content of accounting data, Beaver suggests that one means of testing the FASB's contention of earnings superiority "is to look at the forecasting ability of earnings and current cash flows with respect to future cash flows" [3, p. 129]. Security price research focuses on the role accounting data play in setting security prices. There is, however, a broader class of decisions that are affected by cash flow expectations. The informational demands of investors for a variety of decision contexts include projected cash flows [2]. Lending institutions and other creditors are interested in the cash flow prospects of borrowers in order to assess the probability of collection. Investors require information about the future cash flows of investees to assess dividend prospects. Indeed, "a firm's abnormal rate of return [on its securities] . . . is expressed as a positive function of the unexpected cash flows of the period and the change in that period in the expected cash flows for future periods" [20, p. 65]. Assessing the relative predictive information content of accounting data allows for evaluation of these data without specifying a particular decision context [1, 4]. An investigation of the ability of accounting data to predict future cash flow encompasses a broader view of information content than does security price research. PRIOR RESEARCH To date, only one study reports evidence on the relationships between various accrual data and cash flows [5]. The study concludes that random walk cash flow prediction models generally perform as well as models utilizing accrual data. Furthermore, it is stated that the results "do not support the FASB's assertions that earnings provide better forecasts of future cash flows than do cash flow measures" [5, p. 724]. The relationship of cash flow data with security prics has been more widely investigated [6, 16, 21, 22]. The focus of these studies is on the information content of accrual and cash flow data within the context of how these data are reflected in security prices. Rayburn [16] studied the relative association of accrual accounting components (current, long-term, and aggregate) and cash flow data with security returns. She found that operating cash flow, current accrual, and aggregate accrual data possess significant explanatory power, but that long-term accural data do not. Wilson [21, 22] reported on the relative information content of accrual and funds flow data in two different studies. In one study, Wilson [22] investigated the information content of the current and noncurrent component of earnings by comparing the reaction of security prices surrounding the earnings announcement date to the reaction of security prices surrounding the date on which the annual report arrived at the SEC. …

The Equilibrium Valuation of Risky Discrete Cash Flows in Continuous Time

Abstract: This paper values a contingent claim to discrete stochastic cash flows generated by a Poisson arrival process with a randomly varying intensity parameter. In the most general case, both the size and the arrival intensity of cash flows may correlate wih state variables in a continuous time economy. Assuming the conditions of an intertemporal capital aset pricing model, solutions for the value of the contingent claim can be found using various techniques. The paper suggests immediate applications to the valuation of insurance contracts, the decision to build a firm with unknown future investment opportunities, and the pricing of mortgage-backed securities.

Working Capital Management

Abstract: Part 1 Framework: working capital management. Part 2 The banking system: understanding the flow of money managing disbursements and collections commercial bank packages for cash management. Part 3 Cash management: cash forecasting - advanced techniques investing excess cash - a risk-return framework international cash management cash flow analysis. Part 4 Analyzing working capital: working capital adequacy economics of short-term financing sources of near-term financing. Part 5 Crediting collections: analyzing credit capacity of customers developing credit policies collection policies and government regulations. Part 6 Consumer and business lending: consumer loans small business loans credit scoring systems. Part 7 Inventory: inventory management inventory planning.

Cash Flow Accounting Revisited: A Note on a Partial Replication of the Lee Study

Abstract: This paper examines the attitudes of audit partners in U.S. public accounting firms towards various forms and dimensions of cash flow accounting (CFA), and in part replicates Lee's 1981 study. A total of 800 questionnaires were mailed. Despite the call by some cash flow proponents (i.e., Thomas, 1974) for additional CFA disclosures, the conclusions drawn from this study were that the current historical costs system is, in general, regarded as adequate for evaluating the economic performance of an entity, and there is a perception that publicly disclosed, supplementary cash flow information is not required.

The Relevance of a Segment Cash Flow Statement in Lending Decisions: An Empirical Study

Abstract: The purpose of this study is to examine the relevance of a segment cash flow statement in the lending decisions of commercial bank loan officers. 117 loan officers made short term, intermediate term, and long term lending decisions using case materials prepared for a company that operates in two industries—soft drinks and farm machinery/equipment. Results indicate that segment cash flow statements are relevant in lending decisions under certain circumstances. When given the ‘good news’ that a stable industry was the cash source, loan officers in the soft drinks group granted more long term loans than those in the control group. When given the ‘bad news’ that a troubled industry was the cash source, loan officers in the farm group made smaller short term loans than those in the control group.

Economizing on cash investment in current assets

Abstract: Once a firm has acquired the necessary buildings and fixtures to begin operations, most of its cash flows are the result of investing in and selling of current assets. The bulk of a firm's cash expenditures are for the purpose of either purchasing or adding value to inventories. Inventories that have already been sold but have not yet generated cash inflows are listed as accounts receivable. Excess cash that is not currently used to finance other current assets or that is not needed to pay immediate debt obligations is temporarily invested in marketable securities. All of a firm's cash inflow from normal operations is generated from sales. Sales occur as the eventual result of the liquidation of inventories. Consequently, except for the infrequent events of replacing or adding to fixed assets, cash flow management is virtually synonymous with current asset management.

The Assessment of the Financial Strength of Insurance Companies by a Generalized Cash Flow Model

Abstract: This paper is concerned with the assessment of the financial strength of insurance enterprises of various kinds. This is of concern to many parties — not only shareholders and the supervisory authorities but also management, policyholders, potential investors and financial analysts are among those who require information about it. The aim of this paper is to develop a general framework that may be employed in producing information in assessing capital adequacy for published accounts prepared for shareholders, for the financial statements required by supervisory authorities and for management accounts.

Working Capital Financing and Cash Flow in the Small Business

Abstract: Cash flow problems can force a profitable firm into bankruptcy because the firm is unable to pay its bills. Failure to correctly assess timing and control of cash flows is one of the primary causes of small business bankruptcy. The cash conversion cycle provides a useful framework for methods designed to estimate the amount of cash investment required for current asset financing. The purpose of this paper is to explain how this concept can be used to convert inventory and accounts receivable balances shown on financial statements into estimates of amounts of cash investment required for various levels of sales. INTRODUCTION Cash flow problems create what is probably the most unexpected hurdle on the road to success for the small business. Being able to sell merchandise at prices that are higher than costs does not insure survival. Perhaps one of the most dangerous misconceptions is the common belief among entrepreneurs that adequate profits will automatically result to adequate cash inflows. Profit, as identified in the income statement, is the product of an accounting system in which revenues and expenses are recorded on an accrual basis to reflect the point in time when these events occurred, and not the flows of cash associated with them. This process does not distinguish between liquid assets (those that are in the form of cash or that can be easily converted to cash) and non-liquid assets. Bills and debt obligations cannot be paid with profit. They must be paid in cash. Creditors can force a profitable business into bankruptcy if it does not pay its bills on time. Managers of large corporations began to notice the discrepancy between the two concepts to the 1970's as interest rates began to soar to double digit figures. Executives began to realize that a lack of cash, not profits, prevented their firms from surviving and growing (7). As a result, financial managers in most large corporations now investigate all the underlying factors controlling and influencing cash flows to discover ways of reducing the amount of cash required as well as to find ways to speed up the cash conversion cycle. A survey conducted by Greenwich Associates to 1988 revealed an extremely high level of cash management activity among large companies. Of the surveyed firms, 90 percent had made changes to their cash management systems in the past 12 months, 41 percent had set up programs to review bank costs, and 32 percent had increased cash management services (3). A GREATER CONCERN FOR THE SMALL FIRM While the financial rules for the small business may differ from those of corporate giants, evidence indicates cash management is even more important for the small firm (10). Executives of large corporations first became interested to this topic because of their concern over the opportunity cost of idle cash balances. However, in recent years cash flow problems have become more commonplace, and cash management focus has shifted more in the direction of developing procedures to deal with cash shortages rather than surpluses. Managers of large firms are now having to deal with the same types of cash flow problems that have always plagued small firms. Consequently, cash flow management tools have been developed by large organizations to deal with their problems, thereby creating opportunities for small business to adapt and benefit from the latest technology. Even though large and small firms share common types of liquidity problems, there is no comparison of the impact these have on the different sized firms. Corporate giants in need of additional cash have several options. A typical choice to meet short-term liquidity needs is to sell commercial paper. If a firm needs more permanent capitalization, it can sell stocks and/or bonds in national and international markets. Neither of these options is available to small firms, many of which are already undercapitalized (8). Often the only alternative for the small firm is to rely heavily on short-term sources of financing such as accounts payable, accruals, and lines of credit. …

An Empirical Test of Ross's Cash Flow Beta Theory of Capital Structure

Abstract: This paper empirically investigates Ross's cash flow beta theory of capital structure. Ross hypothesizes that, for firms of similar cash flow variance, there will be an inverse relationship between financial leverage and cash flow beta. This paper provides empirical support for Ross's theory, though the extent of the support depends upon the sample period and the leverage specification.

Alternative Models of Managerial Behavior: Empirical Tests for the Petroleum Industry

Abstract: Explanations for takeovers often focus on managerial inefficiency as an explanation. This paper utilizes panel data for a set of petroleum firms to test two competing hypotheses about managerial inefficiency--the heterogeneous managerial model versus the free cash flow variant of agency theory. By focusing on specific investment categories like exploration, bidding and leasing activity, and R$50D, the effects of changes in management and cash flow are better isolated. The empirical results provide considerable support for the free cash flow variant of agency theory showing that reduced cash flow due to restructuring will curtail investments in exploration, bidding and leasing activity, and R$50D. Copyright 1989 by MIT Press.

Cash Flow Simulation Models for Premium and Surplus Analysis

Abstract: This paper summarizes some typical results generated from a set of general cash flow simulation models which were produced to mimic a statutory insurance company operating in a general economic environment. The flows resulting from the underwriting and investment sides of the business are treated in an integrated and dynamic fashin. A large number of economic, company-specific, tax-specific, surplus-specific, and other factors are allowed in these models. Several results concerning the influence of size of underwriting firm, combined ratio, variability of losses, impairment of capital and probability of insolvency are given.

Cash Flow and the Eurotunnel

Abstract: The Channel Tunnel, a major international investment project funded approximately 80% by debt and 20% by equity, is expected to be completed by 1993. The Eurotunnel Offer for Sale document (published in November 1987) contained financial projections based on traditional accruals-based principles. This paper converts the published information to a cash flow-based format and critically assesses the depreciation, taxation, dividend and financing policy implications. The relevance of depreciation policy in cases of projects with finite lives is discussed, and the paper concludes that information prepared on cash flow-based principles provides an alternative and more useful perspective of the Eurotunnel operations.

The impact of alternative presentations cash flows from operations on the relevance of funds flow information

Abstract: Generally accepted accounting procedures allow the use of either the direct or indirect presentation of cash flow from operations in the statement of cash flows. A behavioral study is employed to examine the impact of these alternative presentations on the relevance of the information provided by the statement. Bank loan officers make line of credit and interest rate decisions/ and projected cash flow from operations based on a set of financial statements presented in either the direct or indirect format. The study also examines the feedback value of the alternative presentations/ which is operationalized as the change in accuracy of projections made before and after feedback. The experiment is performed twice/ once for a company with increasing cash flows/ and again for a company with decreasing cash flows. Data analysis is performed using a priori contrasts and the Mann-Whitney test with the Bonferroni multiple comparison technique. The results of the study indicate that the alternative presentation formats do not result in significant differences for the line of credit/ the interest rate premium/ or the feedback variables. Some evidence is found that the alternative presentations of cash flow from

Variants of the cash flow statement

Abstract: Should production, sales revenue, cash received or deliveries be used to calculate benefit-cost ratios by discounting methods? By using the Flow Equality Principle, production and deliveries are rejected. The best practice is determined as the Little and Mirrlees cash approach because it handles trade credit better.

A Stochastic Cash Model with Deterministic Elements

Abstract: In this paper we present a simple model which gives a solution to a (one period) stochastic cash problem with a fixed cash outlay at the end of the period. We focus on the role of options as insurance contracts, as to value a constraint on the minimum cash level. It is argued that a cash level adjustment is optimal where the sum of the marginal cost of liquidity and the marginal insurance premium (options value) is zero.

A Trading Model Demonstrating the Usefulness of Accounting-Reported Cash Flow Information

Abstract: A Trading Model Demonstrating the Usefulness of Accounting-Reported Cash Flow Information The accounting and financial communities have recently asserted that cash flow analysis is fundamental in assessing an economic entity. The Financial Accounting Standards Board (FASB) first emphasized the importance of cash flow data in Statement of Financial Accounting Concept Number One: Objectives of Financial Reporting by Business Enterprises[8]. In this statement the FASB contends: People engage in investing, lending and similar activities primarily to increase their cash resources. The ultimate test of success (or failure) of those activities is the extent to which they return more (or less) cash than they cost. A successful investor or creditor receives not only a return of investment but also a return on that investment (cash, goods, or services) commensurate with the risk involved. The FASB also states that financial reporting should provide information to help investors, creditors, and others assess the amounts, timing, and uncertainty of prospective net cash inflows to the enterprise. FASB concepts statement No. 5 [9], Recognition and Measurement in Financial Statements of Business Enterprises, reiterates the importance of cash flow information and directs that a full set of financial statements should show the cash flows during the period under report (para. 13). Late in 1987 the FASB adopted SFAS No. 95, which required that cash flow information become the primary basis for the third financial statement. The FASB's statements embody the beliefs of many in the investment community that cash flow analysis is necessary when examining the risk and return of an entity and that accrual-based net income is inadequate for a complete assessment of an investment. Prior empirical studies by Ball and Brown[3], Beaver, Kettler, and Scholes[4], Gonedes[12, 13], Beaver and Manegold[5], Patell[21], and Hill and Stone[18] all show that accrual-based net income is useful in assessing systematic risk and that a correlation does exist between accounting beta and market beta. The review of market-based accounting research by Lev and Ohlson[20] stipulates that these previous studies provide the "good news" that earnings announcements do affect stock prices and, therefore, do have information content. The "bad news," however, is that investigation into the information content of other accounting variables is incomplete. The information content of earnings has been studied[1, 2, 7, 15, 19, 22, 23], and the results seem to provide evidence that dividend information is also informative, especially when coupled with earnings information. The information of cash flows, however, falls within the "bad news" described by Lev and Ohlson [20]. Greene[14], Heath and Rosenfield[17], and Viscione[24] all suggest that cash flow is important in assessing financial distress. Heath and Rosenfield[17] also suggest that cash flow information is necessary in reporting the results from operations and that it is therefore necessary in making investment decisions. The importance of cash flow information to investors is also empirically examined in studies conducted by Harmon[16], Bowen, Burgstahler, and Daley [6], Wilson[25], and Franz and Thies[10], all of whom use the event study technique to ascertain the information content in cash disclosures. A primary drawback in these event studies is the difficulty of establishing the date the event occurred. Wilson[25] in particular went to extremes to isolate the earnings announcement date and the release date of the financial report. His study is predicated upon the assumption that cash flow figures can only be derived from full financial statements and that market reaction does not precede the financial report release date. However, financial data are sometimes leaked or released prior to the formal release of the statements, and, therefore, the initial public availability of information may not be isolable to one specific point in time. …

Selling accounts receivable can improve cash flow.

Abstract: New financing programs especially geared to accounts receivable allow healthcare organizations to convert these assets into cash literally overnight and at costs below the prime interest rate. Certain pooled versions of the financing strategy include non-recourse features that guard against sharing bad debts among the participants. These pooled programs generally allow hospitals to continue managing and billing their own accounts.