eThesis - School of Business electronic theses

BACKGROUND AND MOTIVATION

A new EU's accounting directive (2013/34/EU) focuses on the reliefs for financial statement disclosures of SMEs. Although directive 2013/34/EU is not taking a stand on cash flow preparation, in Finland a working group set by the Ministry of employment and economy has proposed that only large companies would be obliged to prepare cash flow statement as a part of financial statement. The Finnish parliament accepted the proposal in the part of renewed accounting law. The new law came into force on 1st of January 2016. The importance of cash flow statement has been generally recognized by regulators and academics. Therefore the amendment is raising questions of the cash flow statements' role in the financial statement analysis for Finnish SMEs

RESEARCH OBJECTIVES This thesis studies the relevance of cash flow statements in financial statement analysis for Finnish SMEs.

DATA AND METHODOLOGY The data from income statements and balance sheets has been gathered from Voitto+ database. The data from cash flow statement was hand collected at Finnish Patent and Registration Office.

The empirical part of this study is divided into two parts. In the first part, the forecasting abilities of operating cash flows and net income are tested by ordinary least-squares regressions. In the second part it is tested whether the rankings of companies change when companies are ranked by cash flow ratios instead of accrual ratios. The test is performed by using Spearman rank correlation.

RESULTS This research has four main findings. First, prior studies and findings of this study are suggesting that earnings and cash flows are almost equal predictors of future operating cash flows. Second, findings of this study indicate that estimated operating cash flow is not as good predictor as net income or reported operating cash flow. Third, regressions containing both cash flow and accrual data produce more accurate forecasts compared to models with only one variable. Fourth, cash flow based ratios are ranking the companies differently compared to accrual based ratios. This indicates that cash flow based ratios could provide added value into financial statement analysis.