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What are accruals?


Earnings reported in financial reports are often different from underlying cash flows. This difference is called “accruals.” Large positive accruals indicate that a firm’s earnings are much higher than its cash flow. Earnings and cash flow differ because accounting conventions regarding the timing and magnitude of revenues and expenses (revenue recognition and matching principles) are not necessarily based on actual cash inflows and outflows. For example, credit sales are counted toward earnings in the current period even though they have not yet been paid. Similarly, depreciation is deducted from revenue even though there is no cash outlay. See more.