Seasonal Variation in Cash Flows and the Timing Role of Accruals

This paper examines the function of accruals in measuring quarterly firm performance. The authors show that operating accruals play a pronounced role in offsetting quarterly cash flow fluctuations and that this timing role is much stronger than concluded based on annual measurements in the recent literature. A fundamental driver of this timing role of accruals is the significant seasonal variation in operating cash flows, which is determined by the interaction between sales seasonality and working capital policies. They further find that the seasonality in cash flows and the offsetting role of accruals have declined over time. The authors link this trend to international diversification, trends in the importance and seasonality of retail sales, zero-inventory firms, market power, and the rise in supply chain finance.