| dc.description.abstract | Earnings are the summary measure of firm performance under the accrual
basis of accounting. Earnings are important since there are used as a summary
measure of firm performance by a wide range of users. Accrual and cash flow have
been the major issues in accounting literature to measure firm performance. Prior
studies examine about the ability of accrual and cash flow to predict future earnings.
Sloan (1996), Collins and Hribar (2000), Xie (2001), and Sutopo (2001) find that
accrual has less persistence to predict future earnings. On the other hand, prior study
conducted by Wijaya (1999) finds that accrual and cash flow component of current
earnings have equal persistence to predict future earnings. Sutopo (2001) that
examines the effect of earning management on the lower persistence of the earning
performance shows that the less ability of accrual to predict future earnings due to
earning management. Recent study proves that after controlling for growth in net
operating assets, accrual and cash flow components of current earnings have equal
persistence to predict future earnings, because accrual is a component of growth in
net operating assets and the less persistence of accrual is the manifestation of
conservative accounting and diminishing marginal return on investment (Fairfield,
et.al., 2003).
The purpose of this study is to provide further evidence about the impact of
accrual and cash flow components of earnings, growth, and also current profitability
to predict future profitability for the Indonesian case. The data employed in this study
is secondary data from manufacturing firms financial statement listed in Jakarta Stock
Exchange during January 1, 2001 until December 31, 2004. The dependent variable
of this study is one-year-ahead return on assets and the independent variables are
accrual, cash flow, current return on assets, growth in net operating assets and growth
in working capital.
The findings of this study support the empirical discussion that accrual has
less ability to predict future earnings than cash flow. Growth in net operating assets
as a controlling variable also cannot explain the less ability of accruals to predict
future earnings. Consistent with the previous research done by Sutopo (2001) that
proves the less ability of accrual is because accrual relates to earning management.
This study also shows that growth in working capital do not have significant impact
with future earnings. It means that there is no influence on growth in working capital
toward future earnings. | en_US |
