scholarly journals Do Direct Cash Flow Disclosures Help Predict Future Operating Cash Flows and Earnings?

2009 ◽  
Vol 84 (3) ◽  
pp. 893-935 ◽  
Author(s):  
Steven F. Orpurt ◽  
Yoonseok Zang
Keyword(s):  
Cash Flow ◽  
Direct Method ◽  
Cash Flows ◽  
Balance Sheets ◽  
Market Participants ◽  
Future Performance ◽  
Forecasting Performance ◽  
Earnings Forecasting ◽  
Future Cash Flows ◽  
Stated Purpose

ABSTRACT: Motivated by recent FASB, IASB, and CFA Institute comments, we explore the predictive value of direct method cash flow disclosures. A primary stated purpose of the direct method is to better forecast future performance. To examine this purpose, we first document that direct method line items, such as cash received from customers, are not reliably estimable using income statements and either balance sheets or indirect method statements of cash flows. When these stimation (articulation) errors are included in cash flows and earnings forecasting models, forecasting performance significantly improves. In addition, employing a future ERC (FERC) methodology, we find evidence suggesting that market participants utilize direct method disclosures for their stated purpose: to better forecast future operating performance. After conducting several tests for self-selection concerns, we conclude that the direct method is valuable to investors when forecasting future cash flows and earnings.

scholarly journals Cash flow disaggregation and prediction of cash flow

2017 ◽  
Vol 18 (4) ◽  
pp. 464-479 ◽  
Author(s):  
Ehsan Khansalar ◽  
Mohammad Namazi
Keyword(s):  
Cash Flow ◽  
Balance Sheet ◽  
Cash Flows ◽  
Prediction Errors ◽  
Content Type ◽  
Balance Sheets ◽  
Income Statement ◽  
Aggregated Model ◽  
Flow Components ◽  
Future Cash Flows

Purpose The purpose of this paper is to investigate the incremental information content of estimates of cash flow components in predicting future cash flows. Design/methodology/approach The authors examine whether the models incorporating components of operating cash flow from income statements and balance sheets using the direct method are associated with smaller prediction errors than the models incorporating core and non-core cash flow. Findings Using data from US and UK firms and multiple regression analysis, the authors find that around 60 per cent of a current year’s cash flow will persist into the next period’s cash flows, and that income statement and balance sheet variables persist similarly. The explanatory power and predictive ability of disaggregated cash flow models are superior to that of an aggregated model, and further disaggregating previously applied core and non-core cash flows provides incremental information about income statement and balance sheet items that enhances prediction of future cash flows. Disaggregated models and their components produce lower out-of-sample prediction errors than an aggregated model. Research limitations/implications This study improves our appreciation of the behaviour of cash flow components and confirms the need for detailed cash flow information in accordance with the articulation of financial statements. Practical implications The findings are relevant to investors and analysts in predicting future cash flows and to regulators with respect to disclosure requirements and recommendations. Social implications The findings are also relevant to financial statement users interested in better predicting a firm’s future cash flows and thereby, its firm’s value. Originality/value This paper contributes to the existing literature by further disaggregating cash flow items into their underlying items from income statements and balance sheets.

scholarly journals The usefulness of operating cash flow information: Does format matter?

2012 ◽  
Vol 10 (1) ◽  
pp. 44-52 ◽  
Author(s):  
Shadi Farshadfar
Keyword(s):  
Cash Flow ◽  
Indirect Method ◽  
Direct Method ◽  
Cash Flows ◽  
Indirect Methods ◽  
Flow Information ◽  
Operating Cash Flow ◽  
Future Cash Flows ◽  
Direct And Indirect Methods ◽  
Level Analysis

This study investigates whether the direct method of presenting cash flows from operations is superior to the indirect method in its ability to forecast future cash flows. It also considers the effect of industry characteristics on the relative usefulness of direct and indirect methods of cash flow presentation. The study, which uses a sample of Australian firms, finds that both the direct and indirect methods improve the forecast of future cash flows. However, the indirect method of reporting cash flows from operations is more relevant than the direct method in predicting future cash flows. Evidence from the industry-level analysis overall reinforces the main results.

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.

FINANCIAL DERIVATIVES - INTEREST RATE SWAP

2004 ◽  
Vol 10 (3-4) ◽  
pp. 161-168
Author(s):  
Zoran Ivanović ◽  
Elvis Mujačević
Keyword(s):  
Cash Flows ◽  
Basic Form ◽  
Over The Counter ◽  
Interest Rate Swap ◽  
Market Participants ◽  
Forward Contract ◽  
Financial Derivative ◽  
Future Cash Flows ◽  
Interest Payments ◽  
Rate Swap

Swap as a portfolio of forward contract is a financial derivative traded on the over-the-counter market. In its basic form, swap is based on the exchange of future cash flows between two market participants in accordance with the agreed terms. The cash flows that are exchanged are the interest payments and in some circumstances even the notional amount, and transactions are carried out in a period of two to thirty years. Swaps first appeared in 80's, and have evolved from back-to-back loans.

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

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

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.

Turning Around Distressed Project Finance Assets in India: What More Needs to Be Done?

2018 ◽  
Keyword(s):  
Cash Flows ◽  
Project Finance ◽  
Cost Of Debt ◽  
Risk Allocation ◽  
Debt Overhang ◽  
Balance Sheets ◽  
Infrastructure Project ◽  
Bankruptcy Code ◽  
The Cost ◽  
Future Cash Flows

With the Insolvency and Bankruptcy Code firmly in place, India’s distressed project finance assets are turning out to be attractive to institutional investors. Project finance assets need asset-and deal-specific financing solutions in order to achieve successful turnarounds. The turnaround solution must ensure optimum risk allocation and mitigation leading to the buildup of future cash flows. This will, in turn, lead to deleveraging of stressed balance sheets. The authors present a conceptual model and argue that even now the political and regulatory risks for infrastructure project loans in India have not been completely mitigated. This has resulted in a situation of a debt overhang, wherein even economically viable projects may not attract fresh funding. To address this, the article suggests the possible use of priority funding structures, where existing lenders cede charge of the assets in favor of a new lender as a way to reduce the cost of debt and unlock shareholder value. This solution will also ensure that the restructuring package is properly priced (from the project finance lender’s perspective), resulting in the efficiency and viability of the restructured asset.

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.

Arborista, Inc.: An Instructional Resource Case

2013 ◽  
Vol 28 (3) ◽  
pp. 681-690 ◽  
Author(s):  
Marc P. Picconi ◽  
Kimberly J. Smith ◽  
Alexander Woods
Keyword(s):  
Cash Flow ◽  
Direct Method ◽  
Cash Flows ◽  
Integrated System ◽  
Net Income ◽  
Managerial Accounting ◽  
Early Integration ◽  
Operating Cash Flows ◽  
Cash Flow Statement ◽  
Statement Of Cash Flows

ABSTRACT: This deceptively simple case is intended for use as early as the first day of an M.B.A. core accounting course or as a focused review for an undergraduate accounting course. It achieves three primary objectives: accelerating student learning about the statement of cash flows, emphasizing the importance of both the cash flow statement and the income statement in valuation and capital markets, and introducing the three primary financial statements as an integrated system. The case also features the use of the direct method of presenting operating cash flows, both as a pedagogical tool and to allow interested instructors to increase their focus on that method. We have found that students benefit from the early integration of the cash flow statement, as well as the ability to clearly understand how operating cash flows are similar to—and different from—net income. Finally, the case provides an optional managerial accounting module for instructors who teach a course that integrates financial and managerial accounting.

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