A Comparison of Historical Cost and Current Cost Financial Ratio Patterns Using a Refined Cash-Flow Measure¹

Article type: Research Article

Authors: Shriver, Keith A.^a | Wheeler, Stephen W.^b | Deberg, Curtis L.^c

Affiliations: [a] School of Accountancy, Arizona State University, Tempe, AZ 85287-3606, USA, Phone: + 1 602 965-3631. FAX: + 1 602 965-8392 | [b] Florida State University, USA | [c] California State University-Chico, USA

Note: [1] We wish to thank Bruce Johnson for his helpful comments. Also an earlier version of this paper was included in the 1990 International Conference on Cash-Flow Accounting, Nice, France.

Abstract: Conflicting empirical evidence exists about the potential information provided by the separate reporting of cash flows from operations and also about the usefulness of current cost accounting ratios. The present study examined these two issues simultaneously in an empirical investigation of the compositional characteristics of financial ratio patterns using refined cash-flow measures. A sample of 65 primary manufacturing firms and 21 retailing firms was analyzed for the years 1980 and 1982. Fifty-two financial ratios were measured at both historical cost and current cost for each firm, and principal component analysis was used to examine the compositional characteristics and patterns inherent in the ratios. The overall results indicated that (1) separate reporting of a cash flow from operations measure may provide information not already available from operating income or working capital from operations; and (2) current cost ratios may improve interfirm and intertemporal comparability.

DOI: 10.3233/JEM-1993-19403

Journal: Journal of Economic and Social Measurement, vol. 19, no. 4, pp. 281-304, 1993