Accounting data and
Al-Zaytoonah University, Amman, Jordan, and
Newcastle University Business School, Newcastle upon Tyne, UK
Purpose – Accruals data reflect managers’ judgements and estimates. The purpose of this paper is to
examine whether they provide users of accounts with additional insight into a firm’s dividends beyond
that conveyed by cash flows alone.
Design/methodology/approach – The authors employ regression analysis to examine the relative
ability of earnings, cash flows and accruals to explain dividends.
Findings – It is found that both cash flows and accruals (earnings) possess significant explanatory
power for dividends indicating that, on average, UK financial statements provide users with improved
insight beyond that conveyed by cash flows alone.
Research limitations/implications – These results demonstrate the importance of accruals data
for users of accounts. However, if accruals are manipulated for opportunistic purposes then their
usefulness will likely be compromised and users of accounts will loose out. The study focuses on non-
financial, UK dividend-paying firms only.
Practical implications – These results provide direct evidence that UK financial statement data has
significant explanatory power for dividend-paying activity, which may be viewed as good news.
However, this paper reiterates the need for those who prepare and audit accounts to ensure that
accruals truly reflect a firm’s financial situation and are not being “managed” to artificially boost
reported earnings. Short-term accruals are an obvious focus for such activities.
Originality/value – The paper reports the first direct test of the link between disaggregated
earnings components and UK dividends.
Keywords United Kingdom, Dividends, Cash flows, Earnings, Financial reporting, Accruals,
Paper type Research paper
US accounting concepts and standards often state that financial statements
(the income statement, cash flow statement and balance sheet) are intended to
complement each other. An information-set supplemented by accruals components of
earnings should provide a better indication of future cash flows and dividend-paying
ability than merely using cash flow data alone:
The information provided in a statement of cash flows, if used with related disclosures and
information in the other financial statements, should help [y] to assess the enterprise’s
ability to [y] pay dividends [y] (Financial Accounting Standards Board (SFAS) 95, 1987,
The current issue and full text archive of this journal is available at
Journal of Applied Accounting
Vol. 13 No. 1, 2012
r Emerald Group Publishing Limited
JEL classification — G15 – International Financial Markets, G1 – General Financial Markets,
G – Financial Economics
The authors would like to thank the Editor and referees for this paper, together with John
Capstaff (Strathclyde) and Tony Appleyard (Newcastle) both of whom contributed to the doctoral
research from which these results are derived.