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

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.

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The relative predictive ability of earnings and cash flows

Management Research Review ◽

10.1108/mrr-06-2013-0156 ◽

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.

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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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The Incremental Usefulness Of Income Tax Allocations In Predicting One-Year-Ahead Future Cash Flows

Journal of Applied Business Research (JABR) ◽

10.19030/jabr.v23i4.1378 ◽

2011 ◽

Vol 23 (4) ◽

Author(s):

Benjamin P. Foster ◽

Terry J. Ward

Keyword(s):

Cash Flow ◽

Income Tax ◽

Financial Statements ◽

Cash Flows ◽

Financial Accounting ◽

Font Size ◽

Long Time ◽

Operating Cash Flow ◽

One Year ◽

Future Cash Flows

<h2 style="text-align: justify; margin: 0in 34.2pt 0pt 0.5in; mso-hyphenate: none; tab-stops: center 3.25in;">Interperiod income tax allocation has been a hotly debated financial accounting issue for a long time.  Critics of interperiod tax allocation frequently question the usefulness of the extra information, particularly considering the FASB’s decision usefulness approach stated in its Conceptual Framework.  This study extends the research of Cheung et al. (1997) and Krishnan and Largay (2000) by using the ability to predict future taxes paid and future cash flow as criteria to evaluate the usefulness of interperiod tax allocation. This study extends previous research by examining not only whether interperiod tax allocation included in financial statements is useful, but also by examining whether such information is incrementally useful beyond taxes paid. For predicting future taxes paid and operating cash flow, our analyses provides little evidence that interperiod tax allocation information included in financial statements adds incremental predictive value beyond taxes paid as reported on the cash flow statement.</h2>

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Accruals and the Prediction of Future Cash Flows

The Accounting Review ◽

10.2308/accr.2001.76.1.27 ◽

2001 ◽

Vol 76 (1) ◽

pp. 27-58 ◽

Cited By ~ 467

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.

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Relative Ability of Earnings Data and Cash Flow in Predicting Future Cash Flows

International Journal of Accounting and Financial Reporting ◽

10.5296/ijafr.v3i1.3803 ◽

2013 ◽

Vol 3 (1) ◽

pp. 214 ◽

Cited By ~ 1

Author(s):

Nasrollah Takhtaei ◽

Hassan Karimi

Keyword(s):

Cash Flow ◽

Stock Exchange ◽

Accounting Standards ◽

Cash Flows ◽

Financial Accounting ◽

Company Size ◽

Financial Accounting Standards Board ◽

Working Capital ◽

Relative Ability ◽

Future Cash Flows

The purpose of this study is to examine earnings relative ability, operational cash flow, and two traditional measures of cash flows namely net earnings plus depreciation and operational working capital in predicting future cash flows. Also, the effect of company size on ability of predictive measures mentioned is examined in this study. The population examined includes accepted companies in Tehran Stock Exchange during period from 2005 to 2009. The results indicate that net earnings have more ability than operational cash flows and its traditional proxies in predicting the cash flows future. These findings are consistent with Financial Accounting Standards Board (FASB) claim based on earnings in preference on cash flows in predicting future cash flows.

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THE PREDICTIVE ABILITY OF EARNINGS VERSUS CASH FLOW DATA TO PREDICT FUTURE CASH FLOWS: A FIRM-SPECIFIC ANALYSIS

Gadjah Mada International Journal of Business ◽

10.22146/gamaijb.37910 ◽

2018 ◽

Vol 1 (2) ◽

pp. 113

Author(s):

Supriyadi Supriyadi

Keyword(s):

Cash Flow ◽

Prediction Models ◽

Value Relevance ◽

Accounting Information ◽

Cash Flows ◽

Manufacturing Firms ◽

Flow Data ◽

Data Set ◽

Flow Variables ◽

Future Cash Flows

This study evaluated the value-relevance of accounting information (earnings and cash flows) in Indonesia to predict a firm’s future operating cash flows. The predictive usefulness of earnings and cash flows in association with future cash flows is of interest for three reasons. They include providing empirical evidence on the relevant accounting information to assess a firm’s future cash flows, information about the behavior and properties of Indonesian accounting information, and evidence of – or at least providing a basis for evaluating–the validity of the IndonesianAccounting Standards Committee (KPSAK) assertion on the usefulness of accounting information to assess future cash flows.The study evaluated three cash flow prediction models that employed cash flow, earnings, and a combination of earnings-cash flow variables. The models were applied on a firm-specific data set. The data used in this study were semi-annual data for the 61 sample firms (manufacturing firms)listed in the Jakarta Stock Exchange (JSX) spanning the years 1990-1997. The results of this study supported the proposed hypothesis that cash flow data provided better information to assess a firm’s future cash flows than earnings data. Since this study employed manufacturing firms only, future research is necessary to evaluate the robustness of the results to otherpopulations of firms and/or by using an alternative deflator of earnings and cash flows, such as consumer price index (CPI) or market value of the firms. Further extensions of this study include additional refinements of the prediction models on an industry-specific basis and disaggregating cash flow variables into operating, investing, and financing components in order to measure the value-relevance of the statement of cash flows.

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The Relative Ability of Earnings and Cash Flow from Operations in Predicting Future Cash Flows: Evidence from India

International Journal of Accounting and Financial Reporting ◽

10.5296/ijafr.v5i2.8468 ◽

2015 ◽

Vol 5 (2) ◽

pp. 178 ◽

Cited By ~ 1

Author(s):

Mwila Joseph Mulenga

Keyword(s):

Cash Flow ◽

Stock Exchange ◽

Cash Flows ◽

Least Square ◽

Financial Accounting ◽

Financial Accounting Standards Board ◽

Financial Status ◽

Ordinary Least Square ◽

Future Cash Flow ◽

Least Square Approach

The current study examines ability of earnings and cash flow from operations in predicting future cash flow from operations of Indian companies listed in Bombay stock exchange from 2002 to 2014. The study used cash flow from operations directly reported in the cash flow statement. For the purpose of estimating regression models, Ordinary least square approach used and in measuring the predictive power of each models in forecasting future cash flow adjusted R-squared used as forecasting measure. The findings of this study reported cash flow from operations to have more power in than earnings in predicting future cash flow, which do not support the assertion given out by Financial Accounting Standards Board. The findings of this study provide additional insights to Indian capital market researchers and also benefit users of accounting information in India by providing them with empirical evidence on the beneficial ability of cash flow data in predicting future cash flow and that would assist them in making their investment decisions, lending and other decisions and also knowing the financial status of company they wish to invest.

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KEMAMPUAN LABA UNTUK MEMBERIKAN INFORMASI LABA PERIODE MENDATANG DAN ARUS KAS OPERASI PERIODE MENDATANG SELAMA PERIODE KONVERGENSI IFRS DI INDONESIA

CALYPTRA ◽

10.24123/jimus.v5i2.3088 ◽

2017 ◽

Vol 5 (2) ◽

pp. 196

Author(s):

Sheila Irawan ◽

Yie Ke Feliana

Keyword(s):

Cash Flow ◽

Stock Exchange ◽

Cash Flows ◽

Net Income ◽

Full Disclosure ◽

Future Earnings ◽

Future Cash Flow ◽

Business Entities ◽

The Impact ◽

Future Cash Flows

Abstrak - Penelitian ini bertujuan untuk melihat dampak adopsi IFRS secara bertahap khususnya dalam kemampuan earnings periode ini untuk memberikan informasi future earnings dan future cash flows from operations selama periode konvergensi IFRS di Indonesia dengan membandingkan kemampuan earnings untuk memprediksi future earnings dan future cash flows from operations tiap periode. Penelitian ini menggunakan pendekatan secara kuantitatif dengan badan usaha yang terdaftar di BEI selama periode 2010-2013 sebagai objek penelitian. Jumlah sampel yang digunakan pada penelitian ini adalah 420 badan usaha. Temuan penelitian menunjukkan bahwa tidak ada peningkatan hubungan antara earnings periode berjalan dengan future earnings, namun ada peningkatan hubungan antara earnings periode berjalan dengan future cash flows from operations. Hal ini terjadi karena adopsi IFRS menuntut perusahaan untuk lebih transparan dengan adanya full disclosure, sehingga net income kurang dapat dimanipulasi mengakibatkan earnings yang terjadi periode ini belum tentu berulang di periode selanjutnya yang menyebabkan menurunnya kemampuan untuk memprediksi future earnings, namun meningkatkan kemampuan untuk memprediksi future cash flows from operations karena laba yang terjadi periode tersebut berhubungan erat dengan arus kas dari aktivitas operasional di periode selanjutnya. Kata kunci : Current Earnings, Future Earnings, dan Future Cash Flows from Operations Abstract – This study aims to look at the impact of the adoption of IFRS gradually, especially the ability of current earnings to provide information about future earnings and future cash flows from operations during the period IFRS convergence in Indonesia by comparing the ability of earnings to predict future earnings and future cash flows from operations of each period. This study uses a quantitative approach to all of the business entity listed on the Stock Exchange during the period 2010-2013 as the research object. The samples used in this study were 420 business entities. The study's findings that there is no increasing relationship between the current earnings and future earnings, but there is an increasing relationship between current earnings and future cash flows from operations. This happens because of the adoption of IFRS requires companies to be more transparent with their full disclosure, so net income is less manipulated, it makes earnings that occurred this period may not be repeated in the next period which led to a decreased ability to predict future earnings, but improving the ability of current earanings to predict future cash flows from operations because current earnings are more closely related to future cash flow from operating activities. Keywords : Current Earnings, Future Earnings, and Future Cash Flows from Operations

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

Investment Management and Financial Innovations ◽

10.21511/imfi.18(3).2021.13 ◽

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.

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