Ability of Combinations of Cash Flow Components to Predict Financial distress/Pinigu Srautu Komponentu Deriniu Galimybes Numatyti Finansinius Sunkumas

1. Introduction This research investigates the ability of cash flow composition to predict the incidence of financial distress. It aims to enable the insiders and outsiders of organization to utilize financial statements and to enable them to make correct decision based on those statements. The main theme of argumentations on support of accounting knowledge is the emphasis on its usefulness in evaluation process and users' decision making. Beaver (1966) is among the first researchers that applies statistical techniques to predict bankruptcy (Etemadi, Tariverdi 2006). He believes that even though prediction is independent of decision making process, correct decision cannot be made unless forecasting is considered (Mehrani et al. 2005). Prior to decision making, the ability to forecast uncontrollable aspects of phenomena, improves the decisions through increasing awareness of the onward situation. In most cases not only the bankruptcy leads to wealth spoilage of bulks of investors and creditors, it also creates adverse psychological effects that influence different society's groups and may last for years. In addition, in accounting profession, the continuity is pre-assumption about financial statements. Therefore, in order to prevent bankruptcy, its prediction, especially at one stage in advance, that is while the firm is financially distressed, is vitally important. The reason this research emphasizes on cash flow statement is because it cannot be significantly manipulated under management's diverse decisions about the homogenous transactions. So the cash flow statement increases the comparability of operational aspects of companies' financial information. It is believed that even though in every organization the revenue is important but profit is more important and cash flow is of the most importance. controlling the cash flow in the company is as important as the control of blood pressure in human being (Schellenger, Cross 1994). Additionally, professor lee explicitly has stated that the final result of the company's operation is not profit but cash flow. While Profit is an artificial concept, cash flow is objective and real (Etemadi, Tariverdi 2006). 2. The need for bankruptcy theory In recent decades, financial distress and bankruptcy has been the topic of many researches and variety of models has been introduced so far. However, since around 1930s, when pioneer studies were conducted, the literature on bankruptcy suffers from lack of integrated theory. The bankruptcy causes considerable losses for stockholders, investors, creditors, managers, employees, suppliers and customers. It has been suggested that to take preventive actions, underlying factors of liquidation should be identified. Lack of economic theory about financial distress is the salient weakness of researches in the area of predictions about bankruptcy (Soleimani, Nikoomaram 2008). 2.1. Stages of bankruptcy Bankruptcy is caused by multitude of factors. In some cases its reason can be recognized after analysis of financial statements. But there have been some cases that while the company was to decline, some of the items in its financial statements indicated good short- term performance. Thus, although no exact line can be drawn for stages of the bankruptcy, according to their life cycle most of the companies go through the following stages. Few companies may go bankrupt without going through these steps. Figure 1 shows the stages of the bankruptcy. [FIGURE 1 OMITTED] In latency stage, it is expected that the return on assets be decreased considerably. In shortage of cash flow stage, the company does not have enough cash resources to meet current obligations, although it may still have strong profitability background. Financial distress can be perceived as financial exigency. However, researchers believe that financial distress is the stage between bankruptcy and financial exigency. …