THE STUDY OF EARNING QUALITY AND WORKING CAPITAL UNDER THE CASH FLOWS ACCURACY

Transcription

1 THE STUDY OF EARNING QUALITY AND WORKING CAPITAL UNDER THE CASH FLOWS ACCURACY ALI AMIRI Department of Accounting, College of Human Science, Bandar Abbas Branch, Islamic Azad University, Bandar Abbas, Iran Abstract- It has to be vital in each company to forecast accuracy of the earning Quality. It is the most important component of the information that is underlies of many decisions to the judgments of the users about financial information Firms. Hence, The financial forecast accuracy has always been one of the favorite Threads of the users of financial information. The purpose of current research is to investigate the relationship and role of earnings quality in balance sheet items accuracy financial statements of Firms Listed in Tehran Stock Exchange. In order to achieve the objectives of the study 50 companies among 25 active industry over a period of 5 years from 2009 to 2013 has been chosen. The study used the tools such as Pearson's correlation and regression analysis with panel data to test the hypothesis for overcome the research problems. The results has shown that with increasing earning quality, Control in balance sheet items which is helpful to forecast accuracy particularly in cash flows from operating activities. Therefore, the quality of earnings as a reliable measure of financial forecast accuracy such as the annual financial performance, accuracy, a reconciliation of profit and loss, working capital, and the other ratios. The results of this research will be useful for financial managers, bankers, investors for each decision making. Key words- Earning Quality, Financing, Anticipated Financial Variables, Financial Reporting I. INTRODUCTION Earning quality theory for first proposed by financial analysts and stock brokers, because they felt benefit reports earnings a company's power so that they envisage, not show. They found that the predicted future earnings based on reported results, it is difficult. Meanwhile, analysts found that the analysis of company financial statements due to numerous weaknesses in the accounting information measurement is difficult. The basic question is why financial analysts in their assessment of reported net income or earnings per share (without adjustment) do not use and their Respects caution. The answer is that the determination value of the company is not looking just profits quantity, but quality must also be considered. The earning quality is growth potential areas of benefit and the probability Realization of future profits. In other words, the value of a share does not depend only on earnings per share current year But our expectations of the Company's future and Power profitability for future years and confidence coefficient Than depend to future earnings. Financial analysts trying to assess the outlook for corporate profits. Outlook Profit refers to the combination of net profit desirable and undesirable characteristics. For example, in Corporate profit and loss statement, stable elements and items there are To the company that the items and elements of the income statement, it is not stable, higher earnings quality. This allows analysts, the company's future earnings forecasts are more reliable. There are Appropriate fields for "manipulating profit" from conflict of interest and also due to some inherent limits of accounting, including a) failure in the Process future estimates and forecasts b) Ability to use multiple methods of accounting is triggered the real benefit of an Economic entity of the profit reported in the financial statements is different. Researchers and Players accounting professionals gain importance as one of the main criteria to evaluate performance and determine the value of the company Inevitably to assess their reported earnings by economic units. To assess the benefit of concept as earning quality used. In various articles on defining the concept of earning quality of the two features for its determination mentioned: One of them The effectiveness of decision-making and other the relationship between these two concepts and Mr. Hicks is considered Economic profit. In the other words Earning quality is Reported earnings of honest expression of Mr. Hicks Expected profit. The honest expression is an agreement between descriptive and of what it claims to be. The high-quality profit represents earning information useful for decision making by users and also more consistent with its economic benefits Hicks. But because of the information they use in different decisions, there is no possibility to provide a comprehensive definition of profit. One of the criteria for measuring quality of earnings on this basis, the ratio of cash flow from operations to operating earnings CFO / OE in research as diverse as writing Penman (2001) is mentioned. They have argued that this ratio is much closer earning to cash flow earning quality is higher. Profit is high quality in terms of risk reduction information to reduce cost equity and increase trading volume of linked capital costs can be reduced. Increased uncertainty on profit with rising equity costs and reduced trading volumes in the stock market linked. When the public to not ensure the process of financial reporting or financial information published, Are deterred investment, and this in turn helps prevent the development of the capital market. 126

2 High-profit Quality at investors can make investments more enthusiasm. When investors are confident that the quality of corporate profits is high more invest in securities. (Bulow, 2006). Special Interest beneficiaries of financial statements to assess the entity's future net cash flows to estimate its expected return (Francies, 2005). In order to increase forecast future cash flows are Profit disclosed to quality must be. Public dissemination of quality information management, reduce information asymmetry between management and other users will. According to studies, reducing the information asymmetry in turn leads to a reduction in the cost of capital, risk information mitigation, Increase the projected cash flows, improve the valuation of the company and also increase the liquidity of shares (Ardestani, 2007). Given that the risk information from low accuracy at the information provided or Disability Information in estimating expected returns. Earning Quality features are expected to benefit as much as the estimated output of the uncertainty facing investors and stakeholders will have a negative impact on the cost of equity (Francis, 2003). Since the cost of capital based on the expected rate of return investors, the amount of risk accepted by those concerned. Shareholders in determining the expected rate of return on the company's financial statements, in particular, rely on reported earnings. So, the earning quality reported on estimate expected returns shareholders and Determination Company capital cost rate and the anticipated proceeds from the financing is effective. Research approaches in relation to the usefulness of accruals in the prediction of future cash flow accuracy;three Research approaches To empirically assess the usefulness of accruals related to future cash flows, Has been used. It approaches includes value Relationship approach, approach information, content and approach Power Forecast The following explains each of them separately. Value Relationship approach; This approach relies the value relevance of accruals due to their connection with securities simultaneously. Some researchers like Dechow (1994) and Wilson (1986) found that between the various components of accrued profits are associated with the stock returns. In this field of research, the information about the benefits and components used them. Information content approach; Previous studies on this approach to evaluate the usefulness of accrual relying on the relationship between accruals, cash flows and future earnings emphasize, Dechow and et al (1998), Barth and et al (2001) and Kim and Kross (2005), the relationship between accrual current period and cash flows in the after period using regression cash flow in period t + 1 on cash flows and accrual period t predicted. The results of the tests indicate the explanatory power of regression. Power Forecast approach; The done researches on of this approach the usefulness accruals relying on the predictability of their excess than to cash flows and earnings to evaluate. A large number of studies have examined the relationship between the components of profit and future profitability criteria. Several study's ability predicts excess profit than to cash flows have been studied. Bowen and et al (1986), no evidence on the issue of profit before extraordinary items of a better predictor of future operating cash flows than the cash flows are a random walk model, did not. In contrast, research Dechow and et al (1998) showed a profit before extraordinary items and discontinued operations, better predictors of cash flows According the random walk model is. Finger (1994), using timeseries techniques, evidence that past profits more than the last cash flows predictability of future cash flows, Did not. Greenberg and et al (1986) found that the majority of companies in the sample, the total profits than of the current cash flows show a stronger association with future cash flows. Using prediction models, the Financial Accounting Standards Board's claim directly interpreted, they provided evidence that supports the claim of the Board. However, this is no proper testing of models in predicting future cash flows do not. In contrast, Bowen (1986) reported results that claim that profits more communication with the future cash flows than of the different criteria of current cash flow, they will not support. Among other research approach Lorek Research (1993), Lorek and Willinger (1996, Yoder (2007). II. RESEARCH HYPOTHESES There is no relationship Between earnings quality and Working Capital under the Cash flows from operating activities III. RESEARCH METHOD Research Methods from the perspective, purpose of applied research and the views of the nature and method of the research is descriptive and of type correlations.research hypothesis According to the tested combination data and the impact and role the yearning quality on the forecast future cash flows from financing have been tested. The prediction by the Pearson correlation and regression analysis with combined data was used. The scope areas of the research listed companies in Tehran Stock Exchange and Time period between the years 2009 to 2013 study (a period of 5 years) has been set. The study population consisted of listed companies on the Tehran Stock Exchange. Sample selection of The two samples Class and regular or systematic random sampling was used. In the method a class of Statistical Society is divided into homologous and Congruent groups and The sample is then determined for each group. Using regular or systematic random sampling of the required elements of each group is selected homogeneous (Azar, Momeni, 2000). In the method a systematic random sampling required 127

3 sample number (n) of the total population (N) is selected. Thus the first sampling interval (K) is calculated as follows: K = (The number of members of the study community / Number of members of samples) Then the numbers 1 to K randomly select a number and then companies, entities or individuals will be selected following distance K from a number. In this study firstly, the companies listed on the Tehran Stock Exchange under the various industries and groups classified on the basis of 25 active industry over a period of 5 years ( ) we choose. Then, using Cochran formula and As well as using Regular random sampling (systematic) sample of 50 companies was selected. So in order to test the hypotheses, regression analysis is based on a statistical model as follows. So in order to test research hypotheses, regression analysis based on the statistical model used is as follows. Working capital and working capital discretionary accruals 1) WC i,t = β+ β E EARN i,t + β AR ΔAR i,t + β INV ΔINV i,t + β AP ΔAP i,t +u i,t Operating activities 2) OA i,t = β+ β E EARN i,t + β D DEPR i,t +u i,t Cash flow from operating activities 3) CFO i,t = β+ β E EARN i,t + β AR ΔAR i,t + β INV ΔINV i,t + β AP ΔAP i,t + β D DEPR i,t +u i,t All variables are homogenized on the basis of average total assets. IV. RESEARCH VARIABLES If the company has three features the company's revenues quality, and if a company does not have even one of the three conditions above, revenues are low quality. Also in this study to enhance the accuracy and allowing reliance on the results of previous research three variables based on company size, the ratio of book value to market value and the debt ratio has been considered as control variables. Size company is intended as an alternative information environment. To control the effect of investment opportunities of the company's on cash flows, the ratio of book value to market value is used. Typically, this ratio as an indicator for the growth opportunity of the company. The difference between market value and book value of intangible assets in the company can be considered proof. Debt Ratio to asset one of the scale of the financial leverage of the company. Company Size Equivalent Logarithm of the book value of assets of the company and the ratio of book value to market value Equivalent book value of the company's stock to market value is defined. A debt ratio of asset (Leverage) by dividing the company's total debts to total assets is obtained. V. DESCRIPTIVE STATISTICS Table 1 descriptive statistics such as mean, median, standard deviation and other Research variables shows. Table 1: Descriptive Statistics Research In this study, working Capital, cash flows from operating activities and operational activities as the dependent variable and the earning quality as the independent variable in both levels High earning quality companies and low earning quality companies considered. Through The accruals (Change in accounts receivable, change in accounts payable, changes in inventory and depreciation), The first Case three of the short-term accruals, but depreciation is considered a long-term accruals. A study by (ben Hsien Bao, 2004) with title "income smoothing, earnings quality and valuation company" Was conducted to determine the companies earning high quality of the following three index were used: 1. The content of cash earnings (ratio of operating cash flow per share to earnings per share) more than the average of the whole sample. 2. Cash flow per share of operational activities is positive. 3. Earnings per share is positive (earnings per share before items are unexpected). Average profit, operating cash flow and accruals respectively 0.158, and (here accruals deducted from cash flow from operations Of the profits is), so Section the cash benefit is more than double the commitment. Standard deviation Operating cash flow (0.170) of Standard deviation accruals (0.122) more, and it means that the operating cash flow of accruals is more volatility. Another one of ways of calculating accruals, use of the balance sheet approach is (considering the components of accruals). The values in Table 2 of this method are provided. As you can see, the mean changes in accounts receivable, inventory changes, changes in accounts payable, 128

4 depreciation costs and other accruals respectively 0.032, 0.026, 0.016, and are. Table 2: continue descriptive statistics variables * Significant at 1% ** significant at 5% *** insignificant As can be seen, the correlation coefficient between the future cash flow from financing (accrual) and the earning quality (0.578), which at 1%(1%) is significant. As well as The correlation coefficient between the cost of depreciation (other accruals) and benefit Equal (0.092), which at 1% (5%) is significant. The results show a significant and negative linear relationship the level of 1% between operating cash flow and accruals (-0.448) and between the operating cash flow and changes in accounts receivable (-0.106) is established. The results show that the majority of accruals in the method balance sheet related to other accruals and accounts payable changes are minimal. Correlation Coefficients To check There is a linear relationship between the research variables, test, of Pearson correlation coefficients was used. Test results are presented in Table 3 The results of the Models Estimates There is no relationship Between earning quality and working capital and working capital discretionary accruals. The results models1 estimate is presented in Table 4, show that the intercept model (0.022) and coefficient of variation accounts receivable (-0.124) is significant at the 5% level. Earning coefficient (0.517) at 1% and the coefficient of variation the accounts payables (-1.141) at 10% is significant. Coefficient of variation of inventories (0.005) is not significant. Adjusted coefficient model 25.2 percent. Table 4: The results estimate Model (1) Table3: test Pearson correlation coefficients 129 There is no relation between earning quality and operational activities.the results estimate models 2 is presented in Table 5, show that the intercept model ( ) no significant and benefit coefficient (0.481) and depreciation expense coefficient (1.395) respectively were significant at 1% and 10%. Adjusted coefficient of determination model 20.4 percent.

5 Table 5: The results estimate Model (2) CONCLUSIONS There is no relationship Between earning quality and Cash flows from operating activities.the results estimate models 3 is presented in Table 6, show that the intercept model (-0.001) no significant and benefit coefficient (0.524) and the coefficient of variation accounts receivable (-0.329) and coefficient of variation inventories (0.055), the coefficient of variation accounts payable (-0.175) and depreciation expense coefficient (1.092), respectively, at 1% and10% signs. Adjusted coefficient of determination model 29.1 percent. Table 6: The results estimate Model (3) Compared of the Estimates model with the assumptions suggest that the addition of short-term accruals than to adding long-term accruals to profit model explanatory power produced model further increases the earning quality. This topic is meant research hypothesis is rejected. Based on the results of the study hypothesis test, Student t and Fisher test shown that there is a significant relationship between the dependent and independent variables. The function is not solidarity with its effects. Durbin-Watson statistic is close to 2. Since the company by manipulating the accounting information to profit reported to Adjust the closer to the forecasts of analysts, earnings quality is reduced. As a result, the difference between the predicted and actual reduction in reported profits, forecasts show correctly. Therefore, The aim of this study was to The Role of Earning Quality in Balance Sheet Items Financial Statements forecast Accuracy of Firms Listed in Tehran Stock Exchange is to help users and financial analysts. In the area of Accounting Studies, forecasting future cash flows is one of the most important research focus has attracted many researchers is renowned accounting. Among the reasons that the importance of research in this area has been the use of the research by the users of the financial statements and investors to predict cash flows and the company's stock is pricing. Projected cash flows from this is important for investors to assist them in making economic decisions and makes investors and analysts to more accurately of their value their companies. The impact of various factors Based on these models and the ability to their predict, making the results of previous research includes different responses and will mislead Users. Since the financial accounting information reported is intended for use outside companies And because profit is a primary source of such information and In many cases, the current profitability levels as an Important criteria in predicting financial variables (factors) are used businesses. Despite predictions, financial variables based on current profitability are justified But the Available Failures in profit measurement (the subjectivity of estimates and financial projection issues of accrual accounting and the Right choice of management in determining accounting practices in the timing of transactions) Possible differences between Accuracy financial variables and reported earnings. In such circumstances reduced the predictability of variables and optimal use of the elements at models to predict are difficult. To solve this problem the earning quality has been raised. Considering that the earning quality can affect on the decisions and results of users of financial statements is reasonable. Lobo (2012) concluded that the actions of investors, financial for analysts and at more important needs model reducing earning quality of available. However, it is also true that managers incentives to manipulate (fraud) in their profit. The method can lead to lower quality benefits that are sometimes seen as a result of opportunistic managers. Use of The increase that is intended to mislead Users. Many Studies of the relationship between different features, benefits and anticipated financial variables there. This study expectations offers the quality of higher profits (by providing more useful information to analysts) enables analysts to provide more accurate forecasts. However, earning quality texts raise the 130

6 possibility that the benefits of lower quality may be associated with correct predictions. The results of this research suggest that Trust managers on the benefits of lower quality when on analyst forecasts may lead to fewer differences between the expected and benefit of the report. Companies that benefit their With quality Lower risk for investors attract in order to financing. Hence The suppliers of the company's resources looking to invest in companies that are benefiting With quality are eligible. In fact, investment and financing for institutions and companies that have benefited By quality is easier Because a reasonable assurance of the investors to create the desired output. In addition, companies that benefit low-quality or Without-quality experience to attract investors have a higher rate of return than other companies for financing for them. 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