Seasonal Variation in Cash Flows and the Timing Role of Accruals

The aim of the Essex Accounting Centre (EAC) research seminar series is to support our world-class research activities in five key areas: accounting and global development; capital Markets, audit, regulation & reporting; publicness and resilience, precarity, exclusion & social justice; and environment, climate change & vulnerability. The seminar series is also expected to promote inter-disciplinary research that links the work of members of the centre with others both within the university and with external institutions.

We study how seasonal variation affects quarterly accruals and cash flows. We first extend the framework of Dechow, Kothari, and Watts (1998) and analytically show how seasonal variation in operating cash flows and accruals is determined by the seasonality in sales and firms' working capital policies. Next, we empirically find that quarterly working capital accruals play a pronounced role in offsetting cash flows noise and document that this timing role varies predictably with seasonal cash flow variation.

The timing role of quarterly accruals becomes somewhat less pronounced over time, which relates to a systematic decline in seasonal cash flow variation and changes in the determinants of seasonal variation-primarily reductions in firms' inventory holdings and lengthier payment delays to suppliers. Our results add to the recent debate on the significance of the noise-reducing role of accruals, the literature on the economic determinants of accruals, and the literature on the time-series properties of earnings, cash flows, and accruals.