Cash Flow in Bankruptcy Prediction

Abstract

0 Users of financial statements have been showing an increased interest in flow information [e.g., 13, 27]. In lieu of disclosures from companies that detail actual receipts and disbursements, users have had to derive their own estimates based upon the available financial disclosures [e.g., 7, 10, 18]. Empirically, Gombola and Ketz [15, 16, 17] have examined the similarity among several asset flow measures: income from operations, income plus depreciation, working capital from operations, and flow from operations (CFFO). CFFO was obtained by adjusting income from operations for all accruals. They found that income plus depreciation and working capital from operations, though frequently labeled cash flow, were more similar to earnings. Via factor analysis, Gombola and Ketz found that there generally was a return factor on which income from operations, income plus depreciation, and working capital from operations all loaded heavily. They also generally obtained a separate flow factor, thus providing empirical evidence that if one wanted CFFO one had to adjust for all of the accruals.

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