I am doing my research earnings management.
i found two different methods to compute total accruals.
1. Total Accrual =(deltaCA - deltaCL - deltacash +deltashorttermdebt - Dep)/Total Assets
2. Total Accrual= Net profit - Net Cash from Operating Activities.
when I use first method, i am getting negative total accruals for most of the companies, because depreciation is usually high.
second method is simple and clear.
Can I depend on second method.
thanks in advance
What ever Method you use i would expect both ie on a cash or balance sheet basis to give you the same answer.
Ok Total Accurals
"Start by calculating net operating assets for each reporting period using the formula (total assets - cash) - (total liabilities - total debt). Next, calculate the total accruals by subtracting the previous reporting period's NOA from the current reporting period's NOA. "
That's essentially what your formula is doing with Delta - One thing i did note was that you have depreciation deducted. Depreciation is already deducted in Delta Assets and doesnt appear in the method above. So maybe that's the issue
i think you should check the two methods again, because the Net Cash from Operating Activities component of the second method has the depreciation in its calculation and these two methods should result in the same AQ measures
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