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.