A Reexamination of the Persistence of Accruals and Cash Flows

Jennifer Francis and Michael Smith

Journal of Accounting Research, 2005, vol. 43, issue 3, 413-451

Abstract: We reexamine prior studies' conclusion that accruals are less persistent than cash, focusing on two aspects of persistence that are crucial to determining its properties. The first (time specificity) refers to the fact that persistence describes how current‐period shocks to income translate into next‐period income. Traditional measures of accruals are, however, functions of current‐ and non‐current‐period transactions. We show that the inclusion of non‐current‐period transactions leads to a downward (upward) bias on the persistence of accruals (cash flows). We develop alternative measures of accruals and cash flows that are not misaligned and show that the differential persistence of cash flows over accruals is more than 70% smaller using these measures. The second aspect of persistence is firm‐specificity. Specifically, we evaluate persistence using firm‐specific estimations and find that more than 85% of firms show no evidence that accruals are less persistent than cash flows.

Date: 2005
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Journal of Accounting Research is currently edited by Philip G. Berger, Luzi Hail, Christian Leuz, Haresh Sapra, Douglas J. Skinner, Rodrigo Verdi and Regina Wittenberg Moerman

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