Timing of Revenues and Expenses : Evidence from Finland

In accounting, a critical issue is the timing of revenues and expenses in the annual closing of accounts. If expenditures are expired as expenses faster than revenues are generated, the expense method is accelerated. In the opposite case, the expense method is decelerated. Thus, the timing (time lags) of expenses and revenues is an important determinant of earnings and profitability. The objective of this study is to analyze critically alternative methods to estimate the time lags of revenues and expenses. Six different methods based on correlation, return on investment, logarithmic differences, unrestricted OLS, restricted OLS, and Solver optimization are analyzed. Empirically, these methods are applied to nine-year time series of financial statements from a sample of 697 Finnish firms. Empirical analyses show that these methods still have deficiencies that potentially lead to unreliable results of timing. In future, more research on this important topic is called for.