Implications of Accrued Earnings and Growth to Future Profitability

Abstract

Dwihastuti, Erlina (2006). Implications of Accrued Earnings and Growth to Future Profitability. Yogyakarta. International Program. Faculty of Economics. Islamic University of Indonesia. Accruals have been one of the major issues in accounting literature. Prior studies done by Sloan (1996) provide evidence that accruals have less persistence than cash flows in predicting future earnings. For Indonesian case, research done by Wijaya (1999) which prove accruals and cash flows components of earnings had equal persistence to determine future earnings. Recent study done by Farfield et. al (2003) proves that accruals and growth in long term net operating assets have equivalent incremental negative association with one year a-head return on assets. The purpose of this study is to provide further evidence for Indonesian case. Data employed in this research is secondary data. Data used in this research are one year a-head return on assets, accruals, cash flows, current return on assets, growth on net operating assets, and growth in long term net operating assets. The population of this research are all manufacturing firms listed in Jakarta Stock Exchange. Data were taken from Bursa Efek Jakarta (BEJ ) during 2001 until 2004. Data period is pooled time series data. Some data are insufficient, incorrect, incomplete data and extreme data. Final Research object is 87 data. The result of this research shows Cash flows from operation has significant influence to predict one year a-head return on assets but accruals has no significant influence. Based on the research result, accruals and cash flows have equal persistence in predicting future profitability. This research gives evidence that current return on asset can predict one year a-head return on asset. This research result has evidence that accruals and growth in long term net operating assets have equivalent incremental negative association with one year a head return on assets after controlling for current return on assets.