Actual Cash Flows Research Articles

Rational expectations tests on financial analysts’ cash flow forecasts

PurposeThis study investigates whether financial analysts process information efficiently when they make cash flow forecasts.Design/methodology/approachUsing a sample of 3,967 observations spanning 2004–2016, we perform empirical analyses by regressing actual cash flows on previous cash flow forecasts for the current period and a vector of information variables known to the analysts at the time of the forecasts.FindingsWe find that analysts do not incorporate past stock returns or past cash flow information efficiently when they generate cash flow forecasts. We also find weak evidence that analysts do not incorporate past consensus cash flow forecasts or past accruals information when they generate cash flow forecasts.Practical implicationsOur findings contribute to the analyst forecast efficiency literature and highlight the difference between analyst cash flow forecast efficiency and earnings forecast efficiency.Originality/valueWhile extant research on whether analysts use publicly available information efficiently when generating earnings forecasts documents mixed findings (e.g. DeBondt and Thaler, 1990; Abarbanell and Bernard, 1992; Basu and Markov, 2004; Evans et al., 2017), our results regarding analysts’ cash flow forecast efficiency are unambiguous.

The phenomenon of China’s carbon accounting policies and practices

Purpose This study aims to explore China’s carbon accounting policies and practices to enhance its carbon accounting and trading practices and achieve carbon neutrality. Design/methodology/approach This study adopts a phenomenological methodology to explore carbon accounting by setting the scope of the phenomenon, establishing research methods, conducting interviews with 30 participants from 14 emitting entities and four accounting firms and establishing methods for data analysis. Five themes were identified using a five-step coding method. Findings The results show no uniformity in the accounting treatment of carbon trading; however, common characteristics exist, and they have generally adopted simplified and conservative accounting methods under China’s emission trading scheme. Their common characteristics are that the granted allowances are not recognised as assets by most emitting entities, emissions allowance assets are measured using the historical cost method, most emitting entities only conduct accounting when there are actual cash flows or outflows with regard to carbon emissions allowance trading, and only a few emitting entities disclose carbon trading information in their financial statements or corporate social responsibility reports. Originality/value This study highlights accountants’ crucial role in carbon activities by guiding emitting entities’ low-carbon initiatives and culture and transforming managers’ mindsets. It also introduces the China Accounting Standards Committee-based accounting methods for allowances and obligations, aiding carbon disclosure quality and sustainability. These findings also inform the carbon accounting standards that may enhance corporate accountability and address climate change.

Economic evaluation of mineral deposit: A bottom-up approach

Proper economic evaluation of a mineral deposit is critical to effective investment decision-making in a mineral project. However, this often requires detailed mine production scheduling to produce a schedule that reflects the actual cash flow when the project comes on stream. Because of the dexterity required for this task many mine planners and explorationist attempt to use statistical formulas that approximate the mine scheduling and value of the project. The mathematical model developed for production scheduling often produces a constant production rate schedule over an approximate life span of the project. In this paper, we have attempted to apply a bottom-up approach that begins with geometrical modelling and equipment deployment pattern to define the number of equipment required for each sequence of operation based on available workfront in the development of each bench. Then, based on the number of equipment and the production rate at each sequence of operations, a production schedule is developed. This production schedule therefore will reflect annual cash flow since it is based on the sequence of operation. Application of this method on the west pit of Itakpe mine shows a considerable net present value and internal rate of return of the deposit compared with the evaluation made using statistical models. The NPV of the west pit was found to be USD621 million as against USD122.41 million using Nwosu’s formula and USD123.85 million Taylor’s formula. The above value of NPV using the proposed method shows the maximum expected NPV of the mineral project-based technical restrictions. An understanding of this value can guide the mineral property owner in decision-making.

IMPACT OF RECEIVABLES MANAGEMENT ON PROFITABILITY WITH REFERENCE TO TIFSCO PVT LTD

Effective receivables management is a cornerstone of financial health for any business. Accounts receivable represent money owed by customers for goods or services delivered, and efficiently collecting these outstanding payments directly impacts a company's profitability. This research project delves into the intricate relationship between receivables management strategies and a firm's bottom line. We aim to explore how practices like credit policies, collection procedures, and credit analysis techniques influence profitability metrics. The core of the investigation lies in understanding how efficiently companies convert credit sales into actual cash flow. A central focus will be on analyzing the impact of receivables management on key profitability ratios, such as return on assets and operating profit margin. We will explore how factors like the speed of collections, measured by days sales outstanding (DSO), affect a company's ability to generate profits. The research will also consider the potential trade-off between stricter credit policies that might reduce bad debts but also limit sales volume. By examining real-world examples from various industries, the project aims to establish a clear understanding of how sound receivables management practices contribute to a company's overall financial success. The findings of this research can provide valuable insights for businesses to optimize their credit and collection strategies, ultimately leading to improved profitability and a more sustainable financial position. During economic slumps, customers might face financial difficulties, leading to delays or defaults on payments, impacting a company's cash flow and profitability. Granting credit to customers with a high risk of default can lead to bad debts and erode profitability. Lengthy and cumbersome collection procedures can delay the inflow of cash and hinder a company's ability to reinvest in growth opportunities. Poor communication with customers regarding payment terms and overdue invoices can lead to misunderstandings and delays in collections

The impact of cash flow forecasting errors on the accuracy of business value estimation

Aim. To assess the impact of cash flow forecasting errors on the accuracy of business value estimation and to develop a methodology for applying the income approach to business valuation, aimed at reducing these errors and improving the accuracy of business valuation.Objectives. To systematize external and internal factors of cash flows of enterprises of the real sector of economy; to give a qualitative assessment of the impact of large-scale hard-to-predict negative events — the so-called black swans — on cash flows, business value and to determine the requirements to the qualities of a modern manager necessary for effective work in conditions of non-stationary impact of hard-to-predict large-scale external risks; to assess the impact of errors in cash flow forecasting of the post-forecast period on the result of business valuationMethods. On the basis of the system approach the author applied quantitative methods of time factor accounting in financial management, methods of situational, comparative, factor and regression analysis, as well as approaches and methods of financial risk management.Results. According to the results of the research the external and internal factors of cash flows of the enterprises of the real sector of economy were systematized, the most significant factors of deviation of expected and actual cash flows were singled out. A qualitative assessment of the influence of “black swans” on cash flows and business value is given, the requirements for the qualities of a modern manager necessary for effective work in conditions of non-stationary impact of hard-to-predict large-scale external risks are determined. In addition, analytical estimates of the impact of cash flow forecasting errors on the results of applying the methods of income approach to business value assessment are obtained. The methodology of business value estimation, oriented on the increase of estimation accuracy on the basis of taking into account the stages of business life cycle, is offered.Conclusions. The quantitative estimates obtained in the article and the developed recommendations serve as a theoretical and methodological basis for increasing the efficiency of the income approach to business value assessment in conditions of increased uncertainty and market volatility.

Cheating in the evaluation. An expedient to estimate the impact of intangibles on the enterprise value of the high-growth start-ups

This study investigates the effect of investments in intangible fixed assets and human capital on the Enterprise Value (EV) of Italian high-growth startups (HGSs). To test our hypotheses, we conducted several Ordinary Least Squares (OLS) regression analyses on a dataset comprising 782 HGSs. The EV was esti-mates using the Discounted Cash Flow (DCF) method. Our findings reveal a posi-tive and statistically significant relationship between investments in intangible as-sets and EV. However, investments in human capital and highly skilled workers show a negatively relationship with EV. Lastly, a positive and statistically signifi-cant relationship between value-added per employees and the EV of HGSs has been identified. This study offers valuable insight into the process through which new firms gener-ate value. By strategically investing in intangible assets and human capital, startups not only enhance their probability of survival but also improve their growth potential. This allows these companies to overcome the challenges of the early stage and embark on a sustainable growth process. To spotlight the unique value drivers of these companies, unlike prior studies, we manually estimate the EV. We have employed the DCF method by playing the cards face up: we used the actual cash flows realized by the HGSs during the study period instead of rely-ing on forecasts. We have therefore "cheated" to measure the value created by the HGSs. This research can be considered a pioneering study that significantly con-tributes to the ongoing debate on the value creation process in fast growing startups.

A note on free cashflow analysis: Theory versus practice

AbstractIn this note, we compare the methodologies in academic textbooks and the CFA practitioner's guide while demonstrating which academic approach provides the most consistent valuation metric with practitioners. There are many differences when it comes to the items or approaches considered for free cash flow calculations. Some differences, however, are related to the purpose of the calculated free cash flow, for example, the actual free cash flow a company generates during a certain year versus the free cash flow for firm valuation purposes. This note attempts to address this gap and may serve as a guide to faculty as well as practitioners. In what follows, different expositions of the free cash flow model are explored and compared.

TAKING STOCK AND SIZING UP: A STUDY OF THE IMPACT OF IFRS 16 LEASES ON THE STOCK PRICE AND SIZE OF PUBLICLY-TRADED EUROPEAN AIRLINES

ABSTRACT The past few decades for the European airline industry could be described as tumultuous ones. Unforeseeable exogenous shocks such as global contagions, terrorist incidents and fluctuating oil prices have caused increased operational and financial risk for airlines around the globe, including in Europe. Such risks are contrasted against an exigent need for strong solvency and liquidity to fund an array of fixed and variable costs, making the airline model unique in this sense. A further characteristic that typifies this industry is exposure to promulgation of new accounting standards which carry the potential for severe changes to financial reporting. Such a standard, IFRS 16, became effective January 1st, 2019 for publicly-traded firms, mandating capitalization of leased “right-of-use” assets and associated liabilities on airline balance sheets which had previously not been reported. Such a reporting change was significant for airlines with estimates of approximately $3 trillion in newly-capitalized assets. In this study, we analyze a longitudinal dataset spanning 2017-2019 to determine whether passage of IFRS 16 was associated with a statistically significant change in stock price and size, with various proxies employed including market capitalization, total assets and load factors. Other variables including operating income, cash flows from operations, revenues, and debt-to-equity ratio were also examined for any significant changes. The longitudinality of this study was purposively selected to avoid the potentially confounding effects of the Covid-19 pandemic. We show that passage of IFRS 16 was not significantly associated with changes in any of the dependent variables utilized in this research. This study offers valuable findings and a viable contribution to the empirical literature in this field by showing that institutional and individual investors appear to have understood that the extreme changes to the balance sheet were ultimately a reporting nuance rather than a detrimental change to actual cash flows and liquidity. Such findings offer positive implications to financial reporting, costs of capital, market capitalization, and the effect of legislative transparency on airline equities markets. Keywords IFRS 16, Airlines, Leases, Market Capitalization, Load Factor

조건부가치측정법(CVM)을 통한 스마트시티 조성사업의 경제적 가치 추정에 관한 연구

This study aimed to measure the work of the smart city creation project, which is currently being supplied mainly to the public, in terms of currency. This is because public-centered projects have public interest value in addition to the value according to the actual cash flow, so there is a need to convert it into monetary value and estimate it. Among them, this study measured the amount of money value actually felt by residents in the smart city creation project by limiting the budget group to the spatial scope of the small and medium-sized city smart city creation project currently being carried out by the Ministry of Land, Infrastructure and Transport. For analysis, the survey was conducted twice, and it was conducted based on the sampling allocation method by reflecting demographic characteristics. In addition, in order to derive various implications, a survey was conducted in three forms: cost allocation from currently paid taxes, additional tax expenditures, and donations. As a result of the analysis, it was possible to derive about 3.4 billion won for cost allocation from tax, 1.7 billion won for additional tax expenditure, and about 700 million won for donations. Through this, it was possible to confirm how effective the improvement of residents' expectations and quality of life for the small and medium-sized city smart city creation project is through actual costs, not simple satisfaction.

Аудиторська перевірка існування туристичної ренти

The article describes the methodological aspects of the audit of tourist rent, which is one of the sources of income for tourist enterprises. The article aims to develop a method of identifying tourist rent by the subject of financial and economic activity auditing. In order to achieve it, regulatory documents, acts of professional regulation of auditors' activities, and information on the performance of tasks to provide confidence to users of financial statements by independent specialists were used. The specified information was processed by applying such research methods as bibliographic analysis, regulatory analysis, observation, and data systematization. It was found that the emergence and existence of tourist rent are determined by the presence of a tangible or intangible asset used by a tourism industry enterprise. Taking this into account, the audit of the existence of tourist rent involves audit evidence obtaining both the existence of actual rent cash flows and the presence of related assets. The main parameters for which evidence should be obtained are characteristics that allow identification of the asset itself, cash flows that have signs of tourist rent, as well as their mutual identification. For this purpose, taking into account the recommendations of the International Quality Control, Auditing, Review, Other Assurance, and Related Services Pronouncements, the audit procedures that can be applied are defined, and their direction is specified in the context of performing the audit tasks of the availability of tourist rent. The need to physically inspect assets, document and record inspection, external confirmation, inquiry, and analytical procedures was substantiated. The study results allow for optimization of the auditor's work based on the ratio of the costs of resources required to perform the procedures and ensuring the necessary level of trust in the audit results on the part of information users.

Economic analysis of threshing and shelling machine service provision to reduce post-harvest loss in Ethiopia

The Sasakawa Africa Association (SAA) has been addressing the neglected post-harvest sector in Ethiopia through promoting improved storage facilities and introducing handheld and motorized crop shelling and threshing machines. However, post-harvest technologies are poorly adopted by the farmers although the traditional threshing methods often result in high grain losses and low-quality produces due to low awareness of the farmers and service providers on the benefits of the technologies. This study, therefore, was conducted in May 2020 to determine the socio-economic benefits of the threshing/shelling machine so as to inform the service providers on how to improve the adoption of the machine. A total of eight youth group service providers in four woredas of Oromia and Amhara regions in Ethiopia were selected for the study. In a unimodal rainfall production region, the Bako model maize sheller and the dehusker machines were assessed, whereas in a bimodal production region the multi-crop thresher was evaluated. Primary data were sourced through Focus Group Discussions (FGD) and Key Informant Interviews (KII) and secondary data were extracted through document review. Discounted economic parameters such as Net Present Value (NPV), Internal Rate of Return (IRR) and Benefit Cost Ratio (BCR) were used for determining the profitability of the businesses. The result of the actual cashflow analysis in the unimodal area showed that the multi-crop thresher generated a negative NPV (USD -970) with IRR value of -6% and a BCR value of 0.87. On the contrary, in the bimodal area, the NPV was found to be positive (USD 1917.3) with a BCR of 1.21 and IRR value 36%. Congruently, the Bako model maize sheller machine resulted in NPV of USD 8227.5, BCR value of 3.51 with IRR value of 133%. On the other hand, the dehusker machine generated NPV of USD 2247.5 with a BCR of 1.45, and IRR of 24%. The partial budget analysis of the farmers revealed that the threshing machine reduced the threshing costs by USD158.2 (51.9%) per hectare of land compared to the traditional threshing method. On the basis of the minimum food energy requirement, in the two districts alone, the maize grain that was lost through traditional shelling would have fed 3,939 individuals or 788 households, whereas for teff crop, the loss would have fed 6,163 adults or 1233 households throughout the year. Based on the findings, the authors recommend to scale-up the introduction of the machines in the bimodal production areas where two harvesting seasons exist and increase the service charge and working hours- in the unimodal area to improve entrepreneurs’ profit and adoption of the machines. Key words: post-harvest loss, shelling, threshing, dehusking, economic analysis, food security

Incomplete information model of credit default of micro and small enterprises

AbstractThis research constructs a credit default estimation model for micro and small enterprises (MSEs) under the condition of changing information asymmetry. The model is established through the refinement, abstraction and portrayal of the core elements contained in the default trigger mechanism; this mechanism is based on the cash flow, the default boundary and the distribution of actual cash flow in the framework of the incomplete information model. By relaxing the assumption that the bank can fully observe the customer's initial information, this work constructs a theoretical model with practical application value that can effectively describe the default risk of MSEs. Numerical simulation shows that the model can accurately estimate the default probability of MSEs by quantitatively modelling the mechanism of default risk management and control which is applicable to the risk characteristics of MSEs. The model is also suitable for the continuous dynamic estimation and forecast of individual customer credit application and post‐lending risk.

Construction Cash Flow Risk Index

As investment increases in capital projects, financial risks increase, and cash flow prediction and control become more paramount. Higher risks could hinder project performance and increase the chances of failure in multiple aspects of a project. While there are models that aim to assess and forecast risks in the construction industry, none present a technique to include the impact of risks on a project’s cash flow. Therefore, cash flow forecasts tend to exceed the actual cash flow of a project due to inaccurate risk assessment. Thus, this paper presents the Cash Flow Risk Index (CFRI) development process quantifying the impact of risks on a project’s cash flow from an owner’s perspective. To that end, the study explored the literature to identify the risk factors that might impact a construction projects’ cash flow and uncovered 44 factors. The study also validated and consolidated these factors to build a CFRI via a Delphi exercise, which reduced the factors from 44 to 36. In further iterations, the 36 factors were also shared with 32 construction industry professionals to rate their relative importance on a five-point Likert scale, from which relative importance index and weights were obtained. As a result, the CFRI was developed to measure the impact of different risk factors on a typical construction project’s cash flow.

Derivative cash flows and corporate investment

Abstract According to an influential argument, corporate hedging supports corporate investment when internal cash flows are volatile and external financing is costly (Froot, Scharfstein and Stein, 1993). Despite its vast influence, the predictions of this theory have not yet been directly tested using actual derivative cash flows. This study uses hand-collected data on cash flows from derivative positions in the oil and gas industry between 2000 and 2015. Strikingly, on average, an extra dollar in derivative cash flows translates into one more dollar in capital expenditure. During industry recessions, the median ratio of derivative cash flows to capital expenditure rises to 20% for hedging firms, suggesting that derivatives play a crucial role in sustaining investment when the cost of external financing rises abruptly.

On the Comprehensive Balance Sheet Stress Testing and Net Interest Income P/L Attribution

The joint stress testing of net interest income interest rate risk and profit and loss from behavioral risks on a multi-horizon scenario path poses great challenges in enterprise stress testing and earnings risk attributions. We propose a framework for granular level stressed net interest income calculation and P/L attribution. The proposed framework can accommodate net interest income impact from interest rate risk, profit and losses from behavioral risks e.g. prepayments and credit defaults as well as facility and deposit contingent drawdowns at each horizon on a given scenario path. Our net interest income framework uses the matched maturity asset and liability concept to synthetically separate the loan origination risks and the Treasury strategic funding risks. It considerably simplifies the joint market and credit risk stress testing by focusing on the asset versus maturity matched liability net interest income on the asset side and the maturity matched asset versus actual liabilities cash flows on the Treasury side. In this framework there is no need for exact cash flow generation on the asset side. The focus is on the loan net interest income process which requires only the outstanding balance. The loan net interest income process is a stochastic process with behavioral events. At the time of the events, the net interest income process regime-switches to capture the event impact e.g., credit loss or prepayment with associated interest rate impact. The event based net interest income process is suitable for loan-level behavioral state path simulation models with competing risk. We also consider the corresponding net interest income process with conditional default and prepayment rate models. The obtained net interest income process can be applied to both loan-level models as well as pools of homogenous loans. We illustrate the framework with competing hazards and state transition models.

Risk control in maritime shipping investments

In this paper we extend the state-of-the-art stochastic programming models for the Maritime Fleet Renewal Problem (MFRP) to explicitly limit the risk of insolvency due to negative cash flows when making maritime shipping investments. This is achieved by modeling the payment of ships in a number of periodical installments rather than in a lump sum paid upfront, representing more closely the actual cash flows for a shipping company. Based on this, we propose two alternative risk control measures, where the first imposes that the cash flow in each time period is always higher than a desired threshold, while the second limits the Conditional Value-at-Risk. We test the two models on realistic test instances based on data from a shipping company. The computational study demonstrates how the two models can be used to assess the trade-offs between risk of insolvency and expected profits in the MFRP.

Risk Management in Banking Sector: Empirical Data from Commercial Banks in Kosovo

Financial institutions are an important source of financial system functioning of a country and include banks, pension funds, insurance companies, microfinance institutions, and so on. While the risk of financial institutions presents their ability to lose, consequently the change of the actual cash flow from the planned one. Among the major risks facing financial institutions are credit risk, market risk, operational risk and liquidity risk.The purpose of this paper is to investigate the risk management in financial institutions by making a survey with the banking sector, which accounts for most of the financial activities. For this reason, eight financial indicators are used to calculate the financial performance of the eight commercial banks involved in the research, which operate in Kosovo, taking into account the last two years of their operation. From the data derived from these indicators, using the One-Way ANOVA analysis, differences between banks were investigated according to their performance. As a result, it has been found that there are significant differences between banks according to liquidity risk, credit risk, equity risk and profitability risk. In addition, a linear regression model was also performed, which shows that the change in the return on equity (ROE) depends almost entirely on the change in the other seven indicators included.
 Key words: Commercial Banks,Risks, Liquidity, Credit, Equity, Profitability.

Farm Machinery Costs Influnced by Tax Relif and Variable Costs

The selection of correctly matched machinery implements involves both technical and economic data. For solution to more complex machinery management problems, the annual machinery costs are calculated using the actual cash flows, which occur each year. The calculation of annual costs of machine ownership is based on three types of cash flow; capital cost repayable by equal mortgage installments, recurring annual repair and insurance changes and income from selling the machine. For this reason the aim of study is elicitation of modeling for calculating the total cost of tractors and agricultural machinery under suggest Egyptian conditions. The concluded results clear that the present annual cost of machine ownership is substantially altered by tax relief and allowances. By applying a (0%, 30% and 60%) tax on calculation of tractor annual cost, the present annual cost was reduced from to 8374.1Cv to 7519.3 Cv. While, using the conventional methods the present annual cost was 9228.9 Cv. The present approach yields an intermediate cost figure within the range spanned by the present annual ownership costs with and without tax.

The Curious Year-to-Year Performance of Buyout Fund Returns: Another Mark-to-Market Problem?

Buyout funds are essentially leveraged portfolios of a certain kind of U.S. company—that is, a small-cap, low-tech, nonfinancial, nonutility, generator of consistent earnings before interest, taxes, depreciation, and amortization with moderate cyclicality. These characteristics enable lenders to provide high debt levels with a reasonable expectation of repayment. Recent academic studies have raised doubts regarding the alpha of buyout fund returns against mimicking publicly traded portfolios, and buyout investors have sometimes responded that lower returns are offset by the funds’ lower volatility relative to public stocks. Regarding the volatility of such returns, several studies have used a cash-flow-only estimation (CFOE) approach to calculate risk, as an alternative to relying on (1) actual cash flows paid to limited partners and (2) the asset valuations of unsold investments as determined by buyout fund general partners. These studies have suggested that buyout funds’ reported return volatility is understated relative to times-series public market equity returns. This study uses a methodology other than CFOE to evaluate buyout fund return volatility. The authors use a publicly traded mimicking portfolio, adjusted for buyout-type leverage, to measure risk, and conclude that buyout fund returns are more volatile than public equity market returns.

Hindsight effect: What are the actual cash flow timing skills of mutual fund investors?

Abstract This paper analyzes the cash flow timing skills of mutual fund investors, controlling for the hindsight effect (HE). We analyze a sample of US domestic equity mutual funds in the period 1990–2016. Before controlling for the HE, we find that mutual fund investors worsen the return that they achieve with their timing decisions by 1.80% annually. However, after controlling for the HE, the actual prejudice is 0.71% annually. We establish several additional controls obtaining these next results: (i) more sophisticated and informed investors show better timing skills; (ii) the HE is more relevant to less sophisticated investors; (iii) investors wrongly time their exposure to the stock market; and (iv) incubation bias does not significantly affect previous results.