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Components of Accruals, Losses and Future Profitability

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  • Hai Wu
  • Neil Fargher

Abstract

Recent research examines the implications of components of accruals for future profitability. Because the persistence of earnings varies with the level of company profitability, we expect differences between profitable and loss-making companies in the association between components of accruals and future profitability. Using the approach adopted by Richardson, Sloan, Soliman and Tuna (2006) we find evidence suggesting that the components of accruals related to revenue growth and to change in asset turnover are less persistent than the cash flow component of earnings for profitable Australian companies. For loss-making companies, however, the persistence of the accrual component of earnings is found to be higher than for the cash flow component of earnings, suggesting that the accrual component is more informative than the cash flow component in explaining period ahead profitability for many currently unprofitable companies.

Suggested Citation

  • Hai Wu & Neil Fargher, 2007. "Components of Accruals, Losses and Future Profitability," Accounting Research Journal, Emerald Group Publishing, vol. 20(2), pages 96-110, December.
  • Handle: RePEc:eme:arjpps:v:20:y:2007:i:2:p:96-110
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    References listed on IDEAS

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    1. Jeff Coulton & Sarah Taylor & Stephen Taylor, 2005. "Is 'benchmark beating' by Australian firms evidence of earnings management?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 45(4), pages 553-576.
    2. Richardson, Scott A. & Sloan, Richard G. & Soliman, Mark T. & Tuna, Irem, 2005. "Accrual reliability, earnings persistence and stock prices," Journal of Accounting and Economics, Elsevier, vol. 39(3), pages 437-485, September.
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    Keywords

    Accruals; Losses; Persistence;

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