The Role of Cash Flow in Explaining the Change in Company Liquidity

Abstract

In recent years, the rise in corporate bankruptcy has led to an increased interest in the examination of company's liquidity. Credit analysts and other users of accounting data involved in the evaluation of a firm's financial position are often concerned with both the measurement of current liquidity. This study focused on the need for analyzing the accounting information in the reports by listed companies in ASEM to help decision makers especially those related to the variables affecting liquidity.
This study replicates and extends prior research on the relationship between changes in accounting flow variables and company liquidity. Accounting flow measures include earning (E), working capital from operations (WCFO), and cash flows from operations (CFFO). , cash flow from operations is significant in explaining the variation of current and quick ratio but it is not significant in explaining the variation in cash conversion cycle. LJJ found that cash flow from operations is significant in explaining changes in the current ratio and cash conversion cycle but it is not significant in explaining changes in quick ratio. Also LJJ found that cash flows from operations have a negative relationship with Current ratio. He argued that higher current assets (uses of cash) and lower current liabilities (uses of cash) lead to higher current ratios but lower cash flows from operations. The results of this study indicate that cash flows from operations have a positive relationship with current ratio.