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This study examines the role and utility of the Statement of Cash Flows in the credit decision-making process from the perspective of Bulgarian banks. The main purpose is to evaluate how banks use the Statement of Cash Flows to assess the creditworthiness and financial health of the enterprises. A survey of leading Bulgarian banks reveals differences in how they understand and use this information in credit analysis. The findings reveal that, although banks acknowledge the importance of the Statement of Cash Flow for assessing liquidity and risk, it is often overshadowed by other financial reports such as the Balance Sheet and Income Statement. Common issues identified include improper classification of cash flows and lack of clarity in the regulation of non-cash transactions, which hinders the full utility of the Statement of Cash Flows in the credit evaluation process. Although the Statement of Cash Flows is useful for evaluating credit risk, the research identifies limitations in its current use by banks. Recommendations to improve Cash flow statement structure and credit assessments using cash flow information are provided.

International Financial Reporting Standards (IFRS) allow managers flexibility in classifying interest paid, interest received, and dividends received within operating, investing, or financing activities within the statement of cash flows. In contrast, U.S. Generally Accepted Accounting Principles (GAAP) requires these items to be classified as operating cash flows (OCF). Studying IFRS-reporting firms in 13 European countries, we document firms’ cash-flow classification choices vary, with about 76, 60, and 57% of our sample classifying interest paid, interest received, and dividends received, respectively, in OCF. Reported OCF under IFRS tends to exceed what would be reported under U.S. GAAP. We find the main determinants of OCF-enhancing classification choices are capital market incentives and other firm characteristics, including greater likelihood of financial distress, higher leverage, and accessing equity markets more frequently. In analyzing the consequences of reporting flexibility, we find some evidence that the market’s assessment of the persistence of operating cash flows and accruals varies with the firm’s classification choices and the results of certain OCF prediction models are sensitive to classification choices.

Motivated by recent FASB, IASB, and CFA Institute comments, we explore the predictive value of direct method cash flow disclosures. A primary stated purpose of the direct method is to better forecast future performance. To examine this purpose, we first document that direct method line items, such as cash received from customers, are not reliably estimable using income statements and either balance sheets or indirect method statements of cash flows. When these estimation (articulation) errors are included in cash flows and earnings forecasting models, forecasting performance significantly improves. In addition, employing a future ERC (FERC) methodology, we find evidence suggesting that market participants utilize direct method disclosures for their stated purpose: to better forecast future operating performance. After conducting several tests for self-selection concerns, we conclude that the direct method is valuable to investors when forecasting future cash flows and earnings.

This study aims to apply Benford’s Law when detecting fraud and errors in financial statements. The research includes the practical use of this law on examples of large and medium-sized enterprises in the milling, baking and confectionery industry in Serbia. Based on the conducted data analysis and the obtained results, the authors ranked the companies, after which, through a comparative analysis between these two branches, they showed which data in the Cash Flow Report have greater deviations from Benford’s analysis. The obtained data are determined by means of a statistical investigation of the probability distribution of a random variable, where it should be borne in mind that data with lower figures are expected to be more numerous than data with higher figures. The results of the analysis tabularly and graphically present an overview of the movement of cash flows of companies in the milling, baking and confectionery industry.

Previous studies show that, in common-law countries, the explanatory power of stock returns is higher using cash flows than earnings and accruals, while the opposite is true in code-law countries. Moreover, the literature has shown the existence of a country-specific effect motivated by different causes (taxation, financial system, creditor protection, among others). Our aim is to analyze whether this country-specific effect exists among companies in the largest Eurozone countries (France, Germany, Italy and Spain) despite the common regulatory framework, and also to study the causes that explain this country effect. We find empirical evidence that French, Italian and Spanish firms are influenced by tax rules, while German companies are more affected by creditors protection; also, Spain presents a bank-oriented financial system. Besides, the transitory earnings effect, characteristic of code-law countries, is not a cause of the country-specific effect. Therefore, national regulations are more relevant than the general EU regulatory framework.

ABSTRACT This study sought to identify incentives that influence the accounting choices for classifying interest and dividends received or paid in Cash Flow Statements (CFSs), in the period from 2008 to 2014, in non-financial companies of the Brazilian capital market. The hypotheses refer to the effect of the choice of classification for interest and dividends over cash flow from operations (CFO), according to indebtedness, profitability, size, negative CFO, sector, and auditor. This article seeks to contribute by providing evidence on the accounting choices for classification in CFSs, considering the lack of consensus in the results of studies in the Brazilian capital market and helping to better understand these accounting choices and the incentives behind them. A correct understanding of the information in CFSs is fundamental for them to be useful to their users. The existence of accounting choices for classification in CFSs may directly affect this understanding and, consequently, their usefulness. The results help in better understanding the discretion contained in CFSs, enabling the correct use of their information. They can also generate evidence for regulatory bodies to rethink their accounting rules and for academia to direct future research. Two panel data models were developed, using a sample of 352 companies, 2,290 analyzed reports, and 3,764 data items. The results indicate that companies with a greater level of debt, profitability, and size make their accounting choices in order to report higher CFO in the CFS. The evidence obtained reinforces the international findings and adds new analyses in the Brazilian context, contributing to the development of accounting choice theory. RESUMO Este trabalho buscou identificar incentivos que influenciam as escolhas contábeis de classificação de juros e dividendos recebidos ou pagos na Demonstração dos Fluxos de Caixa (DFC), no período de 2008 a 2014, nas empresas não financeiras do mercado de capitais brasileiro. As hipóteses referem-se ao efeito da escolha de classificação dos juros e dividendos sobre o fluxo de caixa operacional (FCO), de acordo com o endividamento, a rentabilidade, o porte, o próprio FCO negativo, o setor e o auditor. Este artigo procura contribuir trazendo evidências sobre as escolhas contábeis de classificação na DFC, considerando a falta de consenso dos resultados de estudos no mercado de capitais brasileiro e auxiliando no melhor entendimento dessas escolhas contábeis e seus incentivos. O correto entendimento das informações da DFC é fundamental para que esta seja útil ao seu usuário. A existência de escolhas contábeis de classificação na DFC pode afetar diretamente esse entendimento e, consequentemente, sua utilidade. Os resultados auxiliam no melhor entendimento da discricionariedade contida na DFC, permitindo a correta utilização de suas informações. Podem, também, gerar evidências para órgãos reguladores repensarem sobre as normas contábeis e para a academia direcionar futuras pesquisas. Foram desenvolvidos dois modelos com dados em painel, utilizando uma amostra de 352 empresas, 2.290 relatórios analisados e 3.764 dados levantados. Os resultados indicam que empresas com maior grau de endividamento, rentabilidade e porte selecionam as suas escolhas contábeis de modo a divulgar um maior FCO na DFC. As evidências obtidas reforçam os achados internacionais e adicionam novas análises no cenário brasileiro, contribuindo para o desenvolvimento de uma teoria das escolhas contábeis.

The financial health hypothesis argues that the valuation multiple of book value of equity (earnings) increases (decreases) as financial health decreases. By considering the liquidity dimension of financial health, we analyze an accrual-based liquidity ratio (current ratio) and a cash-based liquidity ratio (OCF ratio) from the perspective of this hypothesis. Using the median values of these ratios, we divide the sample consisting of listed firms on Borsa Istanbul during 2009–2018 into two and document the ensuing outcomes. Valuation multiples of book value of equity and earnings are reported as being statistically indifferent between low-liquid and high-liquid subgroups obtained for the median current ratio. However, the valuation multiple of book value of equity (earnings) significantly increases (decreases) for the low-liquid subgroup below the median OCF ratio. As the latter is consistent with the financial health hypothesis, this study reveals that the OCF ratio is a more convenient and reliable measure of liquidity than the current ratio.

We characterize the operating-activities section of the indirect-approach statement of cash flows as backward because it presents reconciling adjustments in a way that is opposite from the intuitively appealing, future-oriented, Conceptual Framework definitions of assets, liabilities, and the accruals process. We propose that the reversed-accruals orientation required in the currently mandated indirect-approach statement of cash flows is unnecessarily complex, causing information-processing problems that result in increased cash flow forecast error and dispersion. We also predict that the mixed pattern (i.e., +/-, -/+) of operating cash flows and operating accruals reported by most companies impedes investors' ability to learn the time-series properties of cash flows and accruals. We conduct a carefully controlled experiment and find that (1) cash flow forecasts have lower forecast error and dispersion when the indirect-approach statement of cash flows starts with operating cash flows and adds changes in accruals to arrive at net income and (2) cash flow forecasts have lower forecast error and dispersion when the cash flows and accruals are of the same sign (i.e., +/+, -/-); with the sign-based difference attenuated in the forward-oriented statement of cash flows. We also conduct a quasi-experiment to test our mixed-sign versus same-sign hypotheses using archival samples of publicly available I/B/E/S and Value Line cash flow forecasts. We find that the passively observed samples of cash flow forecasts exhibit a similar pattern of mixed-sign versus same-sign forecast error as documented in our experiment.

The automotive industry is a particularly sensitive sector of the economy. Numerous legal changes have been introduced in Poland that may affect the company's liquidity and profitability. Sales of new vehicles in Poland were very high until the end of 2019. I have presented the most recently available financial data, and hence it can be concluded that they are not distorted. The article discusses the issue of cash flow statements and the associated financial ratios, as well as assesses the financial liquidity among the importers of new, ten best-selling car makers in Poland between 2015 and 2019. Moreover, I have analysed the relationship between profitability ratios and liquidity ratios as well as cash adequacy ratios during this period. According to my findings, in most cases, there is a positive and strong relationship between profitability and financial liquidity in the automotive industry.