The Ability Of Earnings And Cash Flow In Predicting The Corporate Liquidity
Abstract
Nugrahaini, Nurdini. The Ability of Earnings and Cash Flow in Predicting
Corporate Liquidity. International Program, Department of Accounting, Faculty of
Economics, Islamic university of Indonesia. Yogyakarta. 2006.
This research replicates and extends prior work conducted by Lancester and
Stevens on the relationship between liquidity and accrual income versus cash flow.
The measure of corporate liquidity is expanded to use dynamic liquidity (cash
conversion cycle) rather than static liquidity (current and quick ratio). The analysis is
also extended to more recent data.
Prior conclusions on the insignificance of cash flow from operating activities
in explaining liquidity are revised. Cash flow from operating activities is
significantly related to cash conversion cycle.
Recommendation that can be suggested to the users of Financial Statement
include: (1) had better to use cash flows than earnings as a predictor to evaluate
corporate liquidity. (2) had better to use dynamic liquidity (cash conversion cycle)
than static liquidity as the liquidity measurement. Because cash conversion cycle is
needed to capture the ongoing liquidity from the firm's operations.
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