On the Analysis of Firms' Cash Flows

ABSTRACT IN ENGLISH: This paper revisits the whys and hows of cash flows analysis. In a context of equity valuation, we consider three aspects. First, we consider why there is demand for an analysis of cash flows that complements generally accepted accounting principles' (GAAP's) income statement. The issues here pertain to the ambiguity inherent in accruals, primarily due to current and past nonrecurring items, and how one assesses the quality of earnings. Second, we suggest how an analysis of cash flows should be done to assess the extent of biases in accruals. We propose a framework of modified cash accounting (MCA) that satisfies a crucial property: it works just like a regular income statement except that it eschews all accruals. Because an MCA statement depends on consecutive balance sheets (like any standard accounting framework), the core of MCA hinges on what assets and liabilities have been qualified as cash, approximate cash, and the negative thereof. It differs from GAAP's statement of cash flows because it relies on a broader concept of `cash', and MAC has a clear format like an income statement. The paper motivates and shows in some detail how one develops an MCA statement. A final issue deals with how one can assess the quality of a (GAAP) earnings statement by comparing it with an MCA statement. We start from the observation that MCA earnings and GAAP earnings should be the same under the ideal condition when the firm is in a steady state. We then discuss how one can estimate a firm's current-period growth and use this to estimate a normal accrual; this number can then be added to MCA's earnings to obtain a bottom line that compares with GAAP's earnings. // ABSTRACT IN FRENCH: Les auteurs jettent un regard neuf sur les pourquoi et les comment de l'analyse des flux de trésorerie. Dans le contexte de la détermination de la valeur nette réelle, trois aspects en sont étudiés. Premièrement, les auteurs s'interrogent sur les raisons pour lesquelles l'analyse des flux de trésorerie, en complément de l'état des résultats conforme aux PCGR, est en demande. Les questions qui se posent ici portent sur l'ambiquité inhérente aux régularisations, principalement attribuable aux éléments non récurrents de l'exercise et des exercises précédents, ainsi qu'à la façon d'évaluer la qualité des résultats. Deuxièmement, les auteurs suggèrent comment réaliser l'analyse des flux de trésorerie pour évaluer l'étendue de la subjectivité dans les régularisations. Ils p