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Cash Recovery Rates and Profitability Analysis

Accounting policymakers' attempts to develop a conceptual framework for external reporting have emphasized investors' needs to evaluate firms' cash flow generating potential. Cash recovery rates (CRR) have been introduced as possible surrogates for the internal rate of return. The use...

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Bibliographic Details
Published in:The Woman CPA 1991-01, Vol.53 (1), p.16
Main Authors: Volkan, Ara G, Rue, Joseph C
Format: Article
Language:English
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Summary:Accounting policymakers' attempts to develop a conceptual framework for external reporting have emphasized investors' needs to evaluate firms' cash flow generating potential. Cash recovery rates (CRR) have been introduced as possible surrogates for the internal rate of return. The use of a cash flow variable in the evaluation of managerial performance is superior to an accrual approach since it may be assumed that management invests the firm's resources based on discounted cash flow analysis. The usefulness of CRRs in the analysis of a firm's profitability was addressed by testing the stability of the CRRs under specific conditions. Empirical results show that the CRR model generally is valid when a firm displays certain financial characteristics. For firms that exhibit stable CRRs and are large and mature, investors can use the CRR as the firm specific discount rate and profitability measure. However, firms that exhibit various degrees of instability in their CRRs should be cautious in using the CRR to estimate the internal rate of return.
ISSN:0043-7271