The Comparative Predictive Abilities Of Accrual Earnings And Cash Flows In Periods Of Economic Turbulence: The Case Of The IT Bubble

As set forth in SFAC No. 1, a primary objective of financial reporting is to provide information useful to decision makers. Predicting future cash flows represents a major goal of investors and creditors, and accrual and cash flow accounting information present two alternative factors useful in such predictions. The current research investigates the comparative abilities of accrual basis net income and historical cash flows from operations as predictors of future cash flows during both the economic boom leading up to the IT Bubble and the period of economic duress following the burst of that Bubble. Generally, results indicate that historical cash flows outperform accrual net income in predicting future cash flows during these periods of economic turbulence.  Additionally, the evidence reveals great variability in the predictive ability of accrual earnings during the time period studied, suggesting that accrual accounting estimates lose some of their precision during periods of extreme economic fluctuation.

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Do Big 4 auditors improve the ability of goodwill to forecast future cash flows?

Corporate Ownership and Control ◽

10.22495/cocv13i3c1p2 ◽

2016 ◽

Vol 13 (3) ◽

pp. 164-172 ◽

Cited By ~ 1

Author(s):

Ahmad Al-Hiyari ◽

Rohaida Abdul Latif ◽

Noor Afza Amran

Keyword(s):

Financial Reporting ◽

Predictive Ability ◽

Cash Flows ◽

Reporting Standard ◽

Accounting Firms ◽

Big 4 ◽

Business Combination ◽

Accounting Rules ◽

Future Cash Flows ◽

Professional Judgement

The accounting rules prescribed in Malaysian Financial Reporting Standard (MFRS) 3, Business combination, and (MFRS) 136, Impairment of Assets, give managers considerable reporting discretion in allocating goodwill and estimating its actual value. Agency theory predicts that managers may use the accounting discretion granted by the new rules to pursue their own interests at the expense of shareholders. Hence, auditors are required to exercise professional judgement when investigating hard-to-verify management assumptions and valuations. We exploit this issue by examining whether predictive ability of goodwill improved in the presence of Big 4 auditors. We provide evidence that goodwill has a significant predictive ability for second and third-year ahead cash flows which exists only in the firms audited by the large international reputable accounting firms. This suggests that Big 4 auditors play an important role in ensuring appropriate implementation of the present accounting for goodwill.

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Predictive ability of accruals before and after IFRS in the Brazilian stock market

Revista Contabilidade & Finanças ◽

10.1590/1808-057x201806300 ◽

2018 ◽

Vol 29 (78) ◽

pp. 375-389

Author(s):

Terence Machado Boina ◽

Marcelo Alvaro da Silva Macedo

Keyword(s):

Stock Market ◽

Financial Reporting ◽

Predictive Ability ◽

Discretionary Accruals ◽

Cash Flows ◽

Accounting Quality ◽

Convenience Sample ◽

Accounting Choices ◽

Before And After ◽

Future Cash Flows

ABSTRACT This study aimed to analyze and assess the predictive ability of discretionary accruals (DAs) and non-discretionary accruals (NDAs) for forecasting future cash flows before and after the convergence with International Financial Reporting Standards (IFRS) in Brazil. The study is warranted due to the scarcity of research in Brazil on the subject and is relevant because it aims to shed light on whether the changes occurring due to convergence with IFRS in Brazil have improved accounting quality. The accounting choices of managers and accountants in the Brazilian stock market, enabled by IFRS, contribute to an apparent improvement in accounting quality in terms of reliability, the faithful representation of entities’ equity and financial positions, and in particular, the predictive ability for forecasting future cash flows. The population was composed of publicly traded companies listed on the Bovespa and São Paulo Stock, Commodities, and Futures Exchange (BM&FBovespa) in 2004 to 2007 and 2010 to 2015. The non-probability convenience sample is composed of 715 enterprises, once companies from the “finance and insurance” and “funds” sectors and even those considered as “holding” were excluded. The data were pooled by year, as they contain different companies over the time series (unbalanced panel data). The DAs and NDAs produced prior to full convergence with IFRS are negative and statistically significant for predicting future cash flows in the Brazilian stock market, which indicated opportunistic/contractual earnings management. One of the possible explanations for this would be the influence of government tax authorities on Brazilian accounting norms, which could induce managers to manipulate accounting results with the aim of reducing earnings in order to pay fewer taxes, for example. The DAs and NDAs produced after IFRS are positive and statistically significant for predicting future cash flows in the Brazilian stock market, signaling the motivation of discretionary accounting choices under the informational aspect. Current DAs and NDAs add informational power compared to current aggregate accruals. It has also been observed that the current DAs and NDAs originating after IFRS in Brazil, compared to current aggregate accruals, have an informational gain in relation to those produced before.

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Comparing US-GAAP and Iran-GAAP operating cash flows to predict future cash flows

Journal of Financial Reporting and Accounting ◽

10.1108/jfra-06-2013-0047 ◽

2015 ◽

Vol 13 (1) ◽

pp. 39-65

Author(s):

Reza Janjani

Keyword(s):

Financial Reporting ◽

Predictive Ability ◽

Cash Flows ◽

Financial Analyst ◽

Cross Sectional ◽

Content Type ◽

Generally Accepted Accounting Principles ◽

Operating Cash Flows ◽

Statement Of Cash Flows ◽

Future Cash Flows

Purpose – The main objective of this paper is to compare the ability of US-generally accepted accounting principles (GAAP) operating cash flows versus Iran-GAAP operating cash flows in predicting future cash flows. Design/methodology/approach – The sample comprises 240 firms (1,200 firm-years) during the period from 2004 to 2008 for which operating cash flows and other variables are available. Cross-sectional and panel data regression models are used in testing the hypotheses. Findings – This study finds that operating cash flows based on Iran-GAAP are no more effective in predicting future cash flows than those based on USA-GAAP, and the predictive ability of the model is improved by adding the earnings accrual components to the operating cash flows. Originality/value – The study suggests that the Iranian accounting standard setting committee recommends that the statement of cash flows be prepared based on the three-category model instead of the five-category model in an attempt to converge with the International Financial Reporting Standards. Consistent with Financial Accounting Standards Board and financial analyst recommendations, the results reveal that earnings are a better predictor than cash flows from operations.

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An Analysis Of The Comparative Predictive Abilities Of Operating Cash Flows, Earnings, And Sales

Journal of Applied Business Research (JABR) ◽

10.19030/jabr.v23i3.1390 ◽

2011 ◽

Vol 23 (3) ◽

Cited By ~ 4

Author(s):

Charles E. Jordan ◽

Marilyn A. Waldron ◽

Stanley J. Clark

Keyword(s):

Predictive Power ◽

Explanatory Power ◽

Predictive Ability ◽

Cash Flows ◽

Share Price ◽

Font Size ◽

Operating Cash Flows ◽

Aggregate Earnings ◽

Future Cash Flows ◽

Better Than

Prior studies (e.g., Greenburg et al., 1986; Murdoch and Krause, 1989) provide evidence that earnings outperforms historical cash flows in predicting future cash flows. Later research (e.g., Barth et al., 2001) demonstrates that the major accrual components of earnings each possess significant explanatory power in predicting future cash flows and that they augment, rather than replace, the predictive ability of aggregate earnings.  The current study furthers this work by examining the predictive power of another major component of earnings, i.e., sales.  Using share price as the dependent variable and as a proxy for future cash flows, this study compares the predictive abilities of changes in operating cash flows, earnings, and sales.  Similar to the findings in prior research, earnings predicts better than operating cash flows.  More importantly, however, sales predicts with greater accuracy than either operating cash flows or earnings.

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The Predictive Ability of Quarterly Financial Statements

International Journal of Financial Studies ◽

10.3390/ijfs9030050 ◽

2021 ◽

Vol 9 (3) ◽

pp. 50

Author(s):

Hui Zhou ◽

Worapree Ole Maneesoonthorn ◽

Xiangjin Bruce Chen

Keyword(s):

Financial Reporting ◽

Predictive Ability ◽

Financial Statements ◽

Cash Flows ◽

Policy Implications ◽

Quarterly Data ◽

Time Series Modelling ◽

Modelling Techniques ◽

Future Cash Flows

A fundamental role of financial reporting is to provide information useful in forecasting future cash flows. Applying up-to-date time series modelling techniques, this study provides direct evidence on the usefulness of quarterly data in predicting future operating cash flows. Moreover, we show that the predictive gain from using quarterly data is larger for asset-heavy industries and industries with higher levels of earnings smoothness. This study contributes to the accounting literature by examining the usefulness of quarterly financial statements in predicting the realization of future cash flows. Our results help fill the gap in knowledge on quarterly financial statements and provide new insights on why the frequency of financial reporting matters. In addition, our findings have important policy implications for the ongoing debate over interim reporting requirements in multiple jurisdictions around the world.

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Does the Mandatory Adoption of IFRS Improve the Association between Accruals and Cash Flows? Evidence from Accounting Estimates

Accounting Horizons ◽

10.2308/acch-52262 ◽

2018 ◽

Vol 33 (1) ◽

pp. 39-59

Author(s):

Jimmy F. Downes ◽

Tony Kang ◽

Sohyung Kim ◽

Cheol Lee

Keyword(s):

Financial Reporting ◽

Cash Flows ◽

Data Availability ◽

The European Union ◽

Accounting Quality ◽

Financial Reporting Standards ◽

Ifrs Adoption ◽

Accounting Estimates ◽

Accounting Accruals ◽

Future Cash Flows

SYNOPSIS We investigate the effect of mandatory International Financial Reporting Standards (IFRS) adoption in the European Union on the association between accounting estimates and future cash flows, a key concept of accounting quality within the International Accounting Standard Board conceptual framework. We find that the predictive value of accounting estimates improves after IFRS adoption. This improvement is largely driven by specific types of accounting estimates, such as accounts receivable, depreciation, and amortization expense. We also find that the improvement is concentrated in countries with larger differences between pre-IFRS domestic GAAP and IFRS. Our findings suggest that IFRS allow managers to exercise their judgment to provide information about future cash flows through the more subjective/judgmental portion of accounting accruals. JEL Classifications: M16; M49; O52. Data Availability: The data used in this study are from public sources identified in the study.

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The Influence of Future Cash Flow Predictions on Profits in Companies Listed on the Indonesia Stock Exchange

International Journal of Seocology ◽

10.29040/seocology.v2i1.19 ◽

2021 ◽

pp. 026-033

Author(s):

Titik Purwanti

Keyword(s):

Cash Flow ◽

Stock Exchange ◽

Cash Flows ◽

Net Income ◽

Purposive Sampling ◽

Future Cash Flow ◽

Operating Profit ◽

Food And Beverage ◽

Future Cash Flows

This research was conducted to determine the effect of future cash flow predictions on profits (gross profit, operating profit, and net income) in food and beverage companies listed on the Indonesia Stock Exchange. The method used in this research used purposive sampling with a population of food and beverage companies listed on the Indonesia Stock Exchange for the period 2016-2018. The samples in this research were 19 companies. The results obtained indicate that the operating profit variable has a partial effect on future cash flows, while the net income variable and the gross profit variable do not partially affect future cash flows. Simultaneously, gross profit, operating profit and net income have an effect on future cash flows.

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Foreign Monitoring and Predictability of Future Cash Flow

Sustainability ◽

10.3390/su11184832 ◽

2019 ◽

Vol 11 (18) ◽

pp. 4832

Author(s):

Jaehong Lee ◽

Eunsoo Kim

Keyword(s):

Cash Flow ◽

Stock Exchange ◽

Predictive Ability ◽

Financial Statements ◽

Cash Flows ◽

Foreign Investors ◽

Future Cash Flow ◽

Flow Components ◽

Future Cash Flows

A company’s sustainability is generally determined by whether it is able to create a positive long-term cash flow. This paper investigates whether the predictive ability of cash flows and earnings in forecasting future cash flows differs depending on the foreign investors’ ownership. Based on firms listed in the Korea Stock Exchange market from 2000 to 2017, we find that earnings and cash flow components of financial statements enhance the predictability of future cash flow in the Korean stock market. Conversely, foreign investors showed a tendency to decide on investments based on operating cash flow instead of earnings when predicting future cash flow. These findings indicate that reliability towards earnings may fall since foreign investors’ concerns are on the prospects of earnings management. These results were strengthened by the addition of several more analyses including cluster analyses, consideration of information asymmetry and the chaebol governance.

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What Are the Essential Features of a Liability?

Accounting Horizons ◽

10.2308/acch.2010.24.4.623 ◽

2010 ◽

Vol 24 (4) ◽

pp. 623-633 ◽

Cited By ~ 5

Author(s):

Dennis Murray

Keyword(s):

Financial Reporting ◽

Accounting Standards ◽

Cash Flows ◽

Economic Benefits ◽

Primary Objective ◽

Financial Accounting ◽

Financial Accounting Standards Board ◽

Time Dimension ◽

The Past ◽

Definition Of

SYNOPSIS: The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) are in the process of jointly re-examining their conceptual frameworks. The re-examination includes assessing the definition of a liability. The Boards’ existing liability definitions include three criteria: (1) a present obligation; (2) a past transaction or event; and (3) a probable future sacrifice of economic benefits. The Boards have recently proposed that a liability be defined as “a present obligation for which the entity is the obligor” (FASB 2008c, 2). The proposed definition mentions only one time dimension (the present). References to the past and future are omitted. This paper argues that these omissions are undesirable. Omitting a reference to the past removes the link between the definition and the tradition of historically based financial statements. More importantly, however, the failure to reference future sacrifices of economic benefits divorces the definition from the primary objective of financial reporting: to provide information about the “amount, timing and uncertainty of an entity’s future cash flows” (FASB 2008a, para. OB6). This paper offers an alternative definition that emphasizes the past and future rather than the present.

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Predicting Material Weaknesses In Internal Control Systems After The Sarbanes-Oxley Act Using Multiple Criteria Linear Programming And Other Data Mining Approaches

Journal of Applied Business Research (JABR) ◽

10.19030/jabr.v25i6.999 ◽

2011 ◽

Vol 25 (6) ◽

Author(s):

Wikil Kwak ◽

Susan Eldridge ◽

Yong Shi ◽

Gang Kou

Keyword(s):

Data Mining ◽

Linear Programming ◽

Internal Control ◽

Foreign Currency ◽

Predictive Ability ◽

Cash Flows ◽

Multiple Criteria ◽

Font Size ◽

Sarbanes Oxley ◽

Material Weaknesses

<h1 style="TEXT-JUSTIFY: inter-ideograph; TEXT-ALIGN: justify; MARGIN: 0in 0.5in 0pt">Our study proposes a multiple criteria linear programming (MCLP) and other data mining methods to predict material weaknesses in a firm’s internal control system after the Sarbanes-Oxley Act (SOX) using 2003-2004 U.S. data.  The results of the MCLP and other data mining approaches in our prediction study show that the MCLP method performs better overall than the other data mining approaches using financial and other data from the Form 10-K report.  Consistent with prior research, firms that disclosed material weaknesses in their SOX Section 302 disclosures were more complex (based on the existence of foreign currency translations), more often used Big 4 auditors, and had lower operating cash flows-to-total assets ratios than the non-material weakness control firms.  Because of mixed results on several profitability measures and marginal predictive ability for the MCLP and other methods used, more research is needed to identify firm characteristics that help investors, auditors, and others predict material weaknesses.</h1>

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