Distributional Statistics

Using Information from the Statement of Cash Flows

Panel A of Table 5.1 indicates distributional statistics for the full sample before excluding extreme values and Panel B of Table 5.1 indicates distributional statistics after extreme values are excluded.

Table 5.1

Distributional Statistics – Using Information from the Statement of Cash Flows

Panel A: Full Sample, before Excluding Extreme Values (N = 7,605)

Variables127 Mean S.D. 0.25 Median 0.75 Min Max

EBITt128 0.100 0.116 0.053 0.096 0.146 -1.081 1.883 CFOt129 0.134 0.132 0.071 0.125 0.192 -0.880 2.113 TACCt130 -0.033 0.086 -0.067 -0.031 0.002 -1.687 0.800 ∆AR t131 -0.017 0.069 -0.035 -0.008 0.007 -0.674 0.790 ∆INV t132 -0.007 0.040 -0.014 -0.001 0.002 -0.371 0.569 ∆AP t133 0.015 0.071 -0.010 0.008 0.035 -1.435 0.713 DEPAM t 134 _{0.048 0.045 0.026 0.041 0.059 -0.332 1.664} OTHER t135 0.053 0.169 -0.013 0.033 0.111 -2.264 1.577

Note. Full Sample after Scaling variables by average total assets

Panel B: Final Sample, after Excluding Extreme Values (N = 6,485)

Variables Mean S.D. 0.25 Median 0.75 Min Max

EBITt 0.103 0.097 0.056 0.097 0.146 -0.550 1.049 CFOt 0.137 0.112 0.076 0.128 0.192 -0.813 1.731 TACC t -0.034 0.075 -0.067 -0.032 -0.001 -0.1606 0.722 ∆AR t -0.017 0.063 -0.034 -0.009 0.005 -1.035 0.691 ∆INV t -0.007 0.037 -0.014 -0.001 0.002 -0.364 0.569 ∆AP t 0.015 0.062 -0.009 0.008 0.035 -1.435 0.611 DEPAM t 0.048 0.038 0.027 0.042 0.059 0.000 1.467 OTHER t 0.053 0.153 -0.010 0.033 0.107 -1.539 1.577

Panel B of Table 5.1 demonstrates that the mean and median values of EBIT t

(0.103 and 0.097) and CFO t (0.137 and 0.128) are positive and the mean and median

value of accruals (-0.034 and -0.032) are negative. Note that the average value of accruals is computed as the average value of EBIT less the average value of CFO [TACC = 0.103 – 0.137 = -0.034]. It is evident that the average values of EBIT are lower than the average CFO which indicates that earnings include non-cash expenses

All variables deflated by the average of total assets. Variable definitions with respective Extel Financial item name are as follows:

128_{EBIT = Sales (EX. Sales) minus Total Operating Expenses (EX.TradingExpenses).}

129

CFO = Cash generated by operations (EX.CFOperatingInflows) adjusted by discontinued operations (EX.CFOperatingDiscTradingFlow and EX.CFOperatingDiscOpsAfterTax).

130_{TACC = Total Operating Accrual, is obtained as EBIT less CFO}

131 _{∆AR = Change in Accounts Receivable per the Statement of Cash Flow}

(EX.CFOperatingDebtorDecInc).

132

∆INV = change in Inventory per the Statement of Cash Flow (EX.CFOperatingStockDecInc)

133 _{∆AP = Change in Accounts Payable per the Statement of Cash Flow}

(EX.CFOperatingCreditorIncDec)

134_{DEPAM = Depreciation and Amortisation per the Statement of Cash Flow.} 135

such as depreciation and amortisation. In contrast CFO is calculated by adjusting the earnings by the non-cash items in the income statement. TACC includes current accruals and long term accruals and the table indicates that the mean value of current accruals are smaller than the mean value of long term accruals; therefore, TACC is affected by depreciation and amortisation as a proxy for long term accruals. These results are consistent with Dechow et al (1998), Barth et al (2001) and Kim and Kross (2005). Accordingly, the conclusion can be drawn is that the characteristics of the UK data are consistent with accounting information has used in prior studies.. The means of

EBIT and CFO (0.103, and 0.137) are greater than Barth et al‟s means of EARN and

CFO (0.04 and 0.08) and the mean of TACC (-0.034) is lower than Barth et al‟s mean of

accruals (-0.04).

Barth et al (2001) report negative and similar mean and median for accruals (-0.04) which is due to including mean and median depreciation (0.05 and 0.04 respectively) and amortisation (0.01 and 0.00 respectively) in computing accruals. Kim and Kross (2005) also report negative mean and median for accruals, -0.024 and -0.033 respectively. In contrast, Richardson et al (2005) document positive mean and median for accruals, 0.052 and 0.039 respectively, due to their more comprehensive definition of accruals (the change in non-cash working capital plus the change in net non-current

operating assets plus the change in net financial assets) which is not used in this study.

Panel B of Table 5.1 indicates that the variability of CFO (0.112) is greater than

EBIT (0.097), providing initial evidence that accrual accounting reduces variability in

mitigating the timing and matching problems in cash accounting through the creation of both accruals and deferrals. Barth et al (2001) report the identical standard deviation to both CFO and EARN (0.08), whilst Kim and Kross (2005) report greater standard

similar result to Kim and Kross. In contrast, Lev et al (2009) report lower standard deviation for CFO (0.129) than net income (0.149).

The mean and (median) of the components of accruals, change in accounts receivable, change in inventory, change in accounts payable, depreciation and amortisation and other are -0.017 (-0.009), -0.007 (-0.001), 0.015 (0.008), 0.048 (0.042), 0.053 (0.033) respectively, with standard deviation of 0.063, 0.037, 0.062, 0.038 and 0.153.

The mean of short term accruals including change in accounts receivable, change in inventory and change in accounts payable [-0.017 + (-0.007) – 0.015] is smaller than the mean of long term accruals including depreciation and amortisation (0.048). Thus, total accrual is affected by long term accruals.

Consistent with Barth et al (2001) depreciation and amortisation as a long term accrual is less variable than current accruals, change in accounts receivable, change in inventory and change in accounts payable.

Using the Balance Sheet changes method of Accrual Computation

Panel A of Table 5.2 indicates distributional statistics for the full sample, before excluding extreme values and Panel B of Table 5.2 indicates distributional statistics after extreme values are excluded.

Table 5.2

Distributional Statistics - Using the Balance Sheet Changes Method of Accrual Computation

Panel A: Full Sample, before Excluding Extreme Values (N = 7,637)

Variables136 Mean S.D. 0.25 Median 0.75 Min Max

EBITt137 0.100 0.116 0.053 0.096 0.146 -1.081 1.883 CFO t 138 0.147 0.154 0.075 0.139 0.212 -1.642 2.291 TACC t 139 -0.046 0.121 -0.091 -0.041 0.002 -1.691 1.859 ∆TARt 0.023 0.086 -0.006 0.009 0.042 -0.947 0.908 ∆INVt 0.009 0.055 -0.003 0.002 0.020 -0.569 0.700 ∆PREPt 0.003 0.023 -0.001 0.001 0.007 -0.423 0.511 ∆OCAt -0.003 0.064 -0.004 0.000 0.007 -1.269 1.301 ∆LTRt 0.000 0.008 0.000 0.000 0.000 -0.193 0.300 ∆TAPt 0.014 0.065 -0.007 0.006 0.028 -1.129 0.914 ∆OCLt 0.013 0.075 -0.007 0.008 0.032 -1.162 1.168 ∆LTOLt 0.004 0.066 -0.004 0.000 0.008 -1.746 1.013 DEPAMt 0.048 0.044 0.026 0.041 0.059 0.000 1.664

Panel B of Table 5.2 demonstrates that the mean and median values of EBIT t

(0.104 and 0.098) and CFO t (0.149 and 0.141) are positive and the mean and median

value of accruals (-0.045 and -0.041) are negative. These results also reflect the fact that

EBIT includes non-cash expenses such as depreciation and amortisation, but CFO is

computed by adjusting the earnings by the non-cash activities in the income statement. The means of EBIT, CFO and TACC (0.104, 0.149 and -0.045), when using the

balance sheet changes method are greater than means of EBIT, CFO and TACC (0.103,

0.137 and -0.034), when using the Statement of Cash Flow information.

136 _{All variables deflated by the average of total assets. Variable definitions with respective Extel}

Financial item name are as follows:

137_{EBIT = Sales (EX. Sales) minus Total Operating Expenses (EX.TradingExpenses).}

138 _{CFO = EBIT - TACC}

Panel B: Final Sample, after Excluding Extreme Values (N= 6,553)

Variables Mean S.D. 0.25 Median 0.75 Min Max

EBITt 0.104 0.101 0.056 0.098 0.147 -1.081 1.049 CFOt 0.149 0.133 0.078 0.141 0.212 -1.642 1.670 TACCt -0.045 0.108 -0.088 -0.041 0.001 -1.545 1.547 ∆TARt 0.024 0.083 -0.005 0.009 0.042 -0.947 0.868 ∆INVt 0.009 0.053 -0.003 0.002 0.020 -0.569 0.700 ∆PREPt 0.003 0.022 -0.001 0.001 0.006 -0.423 0.341 ∆OCAt -0.004 0.062 -0.004 0.000 0.006 -1.269 1.041 ∆LTRt 0.000 0.008 0.000 0.000 0.000 -0.193 0.300 ∆TAPt 0.015 0.062 -0.006 0.006 0.028 -1.129 0.914 ∆OCLt 0.012 0.072 -0.007 0.007 0.029 -1.162 1.168 ∆LTOLt 0.004 0.056 -0.005 0.000 0.007 -1.746 0.731 DEPAMt 0.048 0.038 0.027 0.042 0.059 0.000 1.467

The mean of short term accruals including change in trade accounts receivable, change in inventory, change in prepayments, change in other current assets, change in trade accounts payable and change in other current liabilities [0.024 + 0.009 + 0.003 + (-0.004) – 0.015 – 0.012] is smaller than the mean of long term accruals including change in long term payables and depreciation and amortisation (0.004 + 0.048). Therefore, total accrual is affected by long term accruals, trade accounts receivable, trade accounts payable and other current liabilities.

Panel B of Table 5.2 indicates that the variability of CFO (0.133) is greater than

EBIT (0.101). As noted earlier, this indicates that accrual accounting reduces variability

in mitigating the timing and matching problems in cash accounting through the creation of both accruals and deferrals. The variability of EBIT, CFO and TACC (0.101, 0.133

and 0.108 respectively) when using the balance sheet changes method, are greater than

EBIT, CFO and TACC (0.097, 0.112 and 0.075 respectively) when using the Statement

of Cash Flow information. This is due to non-cash activities because the statement of cash flows does not consider accruals regarding non-cash transactions (see also Collins and Hribar, 2002).