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Abstract This study examines the usefulness of accounts
receivable to predict future sales and earnings. Accounts
receivable are amounts of cash to be received in the future from
credit sales to customers. For most entities, accounts
receivable are important not only in terms of their magnitude
but also as signals for future earnings prospects. This paper
investigates two competing theories of the information contents
of accounts receivable: earnings quality vs. sales momentum.
More specifically, unexpected accounts receivable are considered
bad news from the "earnings quality" perspective, while they are
viewed as good signals from the aspect of "sales momentum"
standpoint. Based on these two contrary viewpoints, this thesis
proposes hypotheses and tests them to examine the underlying
relationships of accounts receivable and future operating
activities of companies. This article includes all firms listed
in Taiwan Stock Exchange from the first quarter of 1986 to the
second quarter of 1996 in the sample. Both the nonparametric
Wilcoxon rank tests and the OLS regressions are employed to
explore the information contents of accounts receivable. The
findings indicate that accounts receivable are useful signals
for future sales and earnings both before and after controlling
the impact of inventories and their components on future
business prospects. Unexpected accounts receivable of Taiwanese
firms listed in TSE are normally negative leading indicators of
future sales and earnings for almost all forecast horizons. In
conclusion, the main empirical results of Taiwanese firms are
consistent with the "earnings quality" concept of accounts
receivable.
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