Misclassifying cash flows from operations: intentional or not?

• DOI: https://doi.org/10.1108/IJAIM-07-2012-0039
• Pages: 18-32
• Date: 25 February 2014
• Published date: 25 February 2014
• Author: Karen Lightstone,Karrilyn Wilcox,Louis Beaubien

Misclassifying cash f‌lows from

operations: intentional or not?

Karen Lightstone

Accounting Department, Saint Mary’s University, Halifax, Canada

Karrilyn Wilcox

Toronto, Canada, and

Louis Beaubien

Accounting Department, Saint Mary’s University, Halifax, Canada

Abstract

Purpose – The purpose of this paper is to investigate the accuracy and informational quality of the

cash from operations section of the cash f‌low statement.

Design/methodology/approach – This paper empirically tested the accuracy of the cash from

operations reported by Canadian non-f‌inancial companies. The authors studied 262 companies at three

different time periods providing 786 f‌irm observations. For each observation, the balance sheet was

used to conf‌irm the f‌igures reported in the statement of cash f‌lows. In addition, the authors

investigated management’s disclosure of the particular working capital items.

Findings – The f‌indings suggest that in recent years, companies are more likely to overstate their

cash f‌low from operations, thereby presenting a better f‌inancial picture than is supported by the

balance sheet accounts. This would suggest that the investing or f‌inancing section would be

correspondingly understated. The presence of acquisitions reduces overstatements, which may be the

result of more auditor presence.

Research limitations/implications – This paper extends previous research from documented

single, isolated instances of cash from operations being misstated to include a signif‌icant sample with

more generalizable f‌indings. The data are Canadian which may limit the generalizability to other

countries. Future research should address the extent to which f‌inancial analysts rely on the reported

cash from operations f‌igure.

Practical implications – This preliminary study may have implications for f‌inancial analysts and

others relying on the free cash f‌low f‌igure.

Originality/value – This study expands on previous research which has taken place only on a

case-by-case basis.

Keywords Canada, Legitimacytheory, Accounting, Institutional theory, Cashf‌low from operations,

Statement of cash f‌lows

Paper type Research paper

The great enemy of truth is very often not the lie – deliberate,contrived and dishonest – but

the myth – persistent, persuasive, and unrealistic (John Kennedy, 1961).

The establishment and acceptance of accounting practice is as much a technical

matter as one governed by the social context in which the practice eme rges,

is justif‌ied and reviewed, and, ultimately gains acceptance (or not). Mezias (1990;

The current issue and full text archive of this journal is available at

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JEL classif‌ication –M

The authors would like to thank the participants at the European Accounting Association

Conference in Rome, Italy for their helpful comments as well as other anonymous reviewers.

Received 16 July 2012

Revised 10 October 2012

15 November 2012

27 November 2012

Accepted 28 November 2012

International Journal of Accounting

and Information Management

Vol. 22 No. 1, 2014

pp. 18-32

qEmerald Group Publishing Limited

1834-7649

DOI 10.1108/IJAIM-07-2012-0039

IJAIM

22,1

18