Seasonal Variation in Operating Cash Flows and the Timing Role of Accruals∗

Recent research concludes that the timing role of accruals, as identified by the negative contemporaneous correlation between annual operating accruals and operating cash flows, has diminished in recent decades. Explanations provided for this disappearance are increases in one-time nonoperating items that are recognized in accruals and increases in intangible investments that are not recognized in accruals. We posit that annual performance measurements obscure relevant seasonal variation in operating cash flows that should be offset by accruals. Based on tests of changes in quarterly accruals and cash flows, we find strong evidence of a timing role of accruals in recent years. We further find an economically meaningful decline in the within-year seasonal variation in firms’ operating cash flows, which explains the increasing volatility of annual cash flows and the weakening accrual-cash flow relation over time. Additional tests conclude that the increase in intangible investments does not fully explain the weakening accrual-cash flow relation over time.