Accruals and the Prediction of Future Cash Flows

2001 ◽  
Vol 76 (1) ◽  
pp. 27-58 ◽  
Author(s):  
Mary E. Barth ◽  
Donald P. Cram ◽  
Karen K. Nelson
Keyword(s):  
Cash Flow ◽  
Predictive Ability ◽  
Cash Flows ◽  
Accounts Receivable ◽  
Accounts Payable ◽  
Aggregate Earnings ◽  
Industry Membership ◽  
Future Cash Flows

Building on the Dechow et al. (1998) model of the accrual process, this study investigates the role of accruals in predicting future cash flows. The model shows that each accrual component reflects different information relating to future cash flows; aggregate earnings masks this information. As predicted, disaggregating accruals into major components—change in accounts receivable, change in accounts payable, change in inventory, depreciation, amortization, and other accruals—significantly enhances predictive ability. Each accrual component, including depreciation and amortization, is significant with the predicted sign in predicting future cash flows, incremental to current cash flow. The cash flow and accrual components of current earnings have substantially more predictive ability for future cash flows than several lags of aggregate earnings. The inferences are robust to alternative specifications, including controlling for operating cash cycle and industry membership.

scholarly journals Discretionary accruals and the predictive ability of earnings in the forecast of future cash flows: Evidence from Australia

2011 ◽  
Vol 9 (1) ◽  
pp. 597-608 ◽  
Author(s):  
Shadi Farshadfar ◽  
Reza Monem
Keyword(s):  
Cash Flow ◽  
Direct Method ◽  
Predictive Ability ◽  
Discretionary Accruals ◽  
Cash Flows ◽  
Australian Context ◽  
Out Of Sample ◽  
Aggregate Earnings ◽  
Flow Components ◽  
Future Cash Flows

We examine whether discretionary and non-discretionary accruals improve the predictive ability of earnings for forecasting future cash flows in an Australian context. Using both within-sample and out-of-sample forecasting tests; we demonstrate that discretionary accruals improve the predictive ability of earnings in the forecast of future cash flows. Further, discretionary and non-discretionary accruals and direct method cash flow components together are more useful than (i) aggregate earnings, (ii) aggregate cash flow from operations and total accruals, and (iii) aggregate cash flow from operations, discretionary accruals and nondiscretionary accruals.

The relative predictive ability of earnings and cash flows

2015 ◽  
Vol 38 (4) ◽  
pp. 367-380
Author(s):  
Varun Dawar
Keyword(s):  
Prediction Models ◽  
Explanatory Power ◽  
Predictive Ability ◽  
Cash Flows ◽  
Financial Accounting ◽  
Accounting Standard ◽  
Content Type ◽  
Aggregate Earnings ◽  
Future Cash Flows

Purpose – The purpose of this paper is to examine the relative predictive abilities of current earnings (and its components) and cash flows for next period cash flows in case of Shariah-compliant companies in India. Design/methodology/approach – The study uses the list of CRISIL NSE Index (CNX) Nifty Shariah Index companies as its sample for a period of 10 years for conducting the analysis. The study utilizes the cash flow prediction models to examine the relative predictive abilities of current earnings (and its components) and cash flows for next period cash flows. Findings – The study report that contrary to Financial Accounting Standard Board assertion, current cash flows have superior predictive ability of next period cash flows than current aggregate earnings in case of Shariah-compliant companies in India. The results further show that there are no gains from decomposing earnings into accruals and cash flows in predicting future cash flows. There is no increase in explanatory power (measured by adjusted R2) when aggregate earnings are disaggregated into accruals and cash flows to predict next period cash flows. Practical implications – The empirical findings of the study will enable the Shariah compliant investors to understand the role of current earnings (and its components) and cash flows in predicting next period cash flows in case of Shariah-compliant companies in India. Originality/value – To the best of author’s knowledge, this is the first study which examines the relative predictive abilities of current earnings (and its components) and cash flows for next period cash flows in case of Shariah-compliant companies in India.

scholarly journals Predictive value of accruals and the moderating role of company size: Empirical evidence from Jordan

2021 ◽  
Vol 18 (3) ◽  
pp. 142-150
Author(s):  
Mohammad Fawzi Shubita
Keyword(s):  
Cash Flow ◽  
Cash Flows ◽  
Company Size ◽  
Short Term ◽  
Accounts Payable ◽  
Accounting Accruals ◽  
Cash Flow Statement ◽  
The Relationship ◽  
Future Cash Flows

The cash flow statement aids the management to ascertain the profitability and liquidity position of a company. One can understand from the cash flow statement how efficiently the company is paying its obligation in various forms of liability and expense. This study aimed to explore the ability of short-term accounting accruals to predict cash flows. The sample included 77 Jordanian companies listed between 2006–2019. Cash flows were measured by net operating cash flows, and short-term accounting accruals were expressed as: change in account receivable, change in accounts payable, change in inventories, and other accruals. The results demonstrated the ability of short-term accounting accruals to predict future cash flows. The relationship between future cash flows and the short-term accounting accruals was significant, except for its relationship to the change in accounts payable. However, the findings indicate that the size of the company has not moderated the relationship between accounting accruals and operating cash flow. The study recommends using other accounting items besides short-term accounting accruals, to improve their ability to predict future cash flows and use of control variables that can increase the predictive power of the study model, such as financial leverage and company size. AcknowledgmentsI would like to thank Amman Arab University for its great support, and for funding this study.

scholarly journals Foreign Monitoring and Predictability of Future Cash Flow

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.

scholarly journals The Role of Dividend Payout in the Determination of the Relationship Between Earnings Before Interest and Tax Cash Flow From Operations, Capital Expenditures and Firm Sustainable Cash Flows: A Case Of Non-Financial Firms

2018 ◽  
pp. 382-390
Keyword(s):  
Cash Flow ◽  
Stock Exchange ◽  
Predictive Ability ◽  
Cash Flows ◽  
Free Cash Flow ◽  
Capital Expenditures ◽  
Dividend Payout ◽  
Financial Firms ◽  
Free Cash Flows

The prime objective of the current study is to determine the predictive ability to earnings before interest and tax, cash flow from operations, dividend payout, and capital expenditures for free cash flows. In addition to the current study is also intended to highlight the moderating role of dividend payout predictive ability to earnings before interest and tax, cash flow from operations, and capital expenditures for free cash flows. To achieve the objective of the study the data of 100 listed non-financial firms are collected from the annual report of the firms listed on the Iraq Stock Exchange. The data is collected over a period of six years from 2012-2017. To achieve the first set of objective regarding the direct results we have chosen OLS as a final statistical test after undergoing basic diagnostic analysis. To achieve the second set of objectives regarding the indirect effect of dividend payout, we have used the hierarchical multiple regression models.The statistical software, STATA is used for the analysis purpose. The findings of the study have shown a great deal of agreement with hypothesized results and also provided support to the pecking order theory and theory of free cash flow. The findings of the study will be helpful for policymakers, investors, scholars, and students in understanding the key factors which affect the free cash flow decisions and determine its predictability.

scholarly journals The Review of Literature on the Role of Earnings, Cash Flows and Accruals in Predicting of Future Cash Flow

2017 ◽  
Vol 6 (2) ◽  
pp. 59 ◽  
Author(s):  
Mwila Joseph Mulenga ◽  
Meena Bhatia
Keyword(s):  
Cash Flow ◽  
Capital Market ◽  
Accounting Information ◽  
Cash Flows ◽  
Financial Accounting ◽  
Accounting Standard ◽  
Future Cash Flow ◽  
Accounting Research ◽  
Future Cash Flows

AbstractResearch on the relative ability of accounting information aims in examining the ability of accounting information to predict future cash flow and earnings, based on the assertion given by Financial Accounting Standard Board (FASB) which states that the earnings and its components  have a better predictive power than cash flow itself (FASB,1978 para 44). Many studies have been conducted by various researchers but only few of these studies succeed to match with this assertion. This study aims to provide review on the study related to ability of earnings, cash flows from operations and accruals to predict future cash flows where methodology used in this line of research and presentation of empirical results are discussed. The review provides in depth discussion for the purpose of assisting the researchers to get familiarity with line of financial accounting research investigated capital market based accounting research and also as guidance for future researchers.Keywords: Cash flow from operations, Earnings, Accruals, Prediction, Capital Market Based Accounting Research.                                                              

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

2011 ◽  
Vol 23 (3) ◽  
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

<p class="MsoBodyText" style="text-align: justify; margin: 0in 34.2pt 0pt 0.5in;"><span style="color: black; font-size: 10pt;"><span style="font-family: Times New Roman;">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.<span style="mso-spacerun: yes;">&nbsp; </span>The current study furthers this work by examining the predictive power of another major component of earnings, i.e., sales.<span style="mso-spacerun: yes;">&nbsp; </span>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.<span style="mso-spacerun: yes;">&nbsp; </span>Similar to the findings in prior research, earnings predicts better than operating cash flows.<span style="mso-spacerun: yes;">&nbsp; </span>More importantly, however, sales predicts with greater accuracy than either operating cash flows or earnings.</span></span></p>

scholarly journals The Predictive Ability of Quarterly Financial Statements

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.

Does Financial Reporting Conservatism Mitigate Underinvestment?

2017 ◽  
Vol 34 (2) ◽  
pp. 258-283 ◽  
Author(s):  
Hyun A. Hong ◽  
Yongtae Kim ◽  
Gerald J. Lobo
Keyword(s):  
Information Asymmetry ◽  
Cash Flow ◽  
Financial Reporting ◽  
Cash Flows ◽  
Agency Conflicts ◽  
Negative Relation ◽  
Investment Projects ◽  
External Capital ◽  
Cash Flow Volatility

This study examines the role of financial reporting conservatism in mitigating underinvestment problems. Recognizing that volatile cash flows increase the need to access external capital markets and that agency conflicts and information asymmetry make external capital costlier than internal capital, which leads managers to forgo valuable investment projects, Minton and Schrand document a negative relation between cash flow volatility and investment. We draw on Minton and Schrand’s framework to isolate underinvestment problems and hypothesize and document that conservatism mitigates the negative relation between cash flow volatility and investment and that this mitigative effect is more pronounced for firms with ex ante more severe agency conflicts. We also document that conservatism mitigates the sensitivity of investment to cash flow volatility by facilitating access to external capital.

scholarly journals Kemampuan Laba dan Arus Kas Operasi dalam Memprediksi Laba dan Arus Kas Masa Depan

2018 ◽  
pp. 80
Author(s):  
Frans AP Dromexs Lumbantoruan ◽  
I Gusti Ngurah Agung Suaryana
Keyword(s):  
Cash Flow ◽  
Stock Exchange ◽  
Linear Regression Analysis ◽  
Flow Property ◽  
Multiple Linear Regression Analysis ◽  
Cash Flows ◽  
Future Earnings ◽  
Analysis Technique ◽  
Operating Cash Flow ◽  
Future Cash Flows

This study aims to determine the ability of earnings and operating cash flows in predicting earnings and future cash flows. This research was conducted on property and real estate companies listed on the Indonesia Stock Exchange. The samples used by 20 companies with 40 observations. The sampling was done by nonprobability samplingmethod with purposive samplingtechnique. The analysis technique used is multiple linear regression analysis. Based on the result of the analysis, earnings influences in predicting future earnings. Likewise, earnings and operating cash flow have an effect in predicting future cash flows. However, operating cash flow is not influential in predicting future earnings. Keywords: profitability, cash flow, property

Sign in / Sign up

Export Citation Format

Share Document