The usefulness of operating cash flow and accrual components in improving the predictive ability of earnings: a re-examination and extension

Farshadfar, Shadi; Monem, Reza

doi:10.1111/j.1467-629x.2012.00486.x

Cited by 34 publications

(45 citation statements)

References 34 publications

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“…[PLEASE INSERT FIGURE 1 HERE] Consistent with the prior work (Cheng and Hollie, 2008;Farshadfar and Monem, 2013) suggesting that past OCF enables prediction of future OCF, we present the primary hypothesis of the study:…”

Section: Hypotheses Development and Research Designsupporting

confidence: 78%

“…Moreover, they found the predictive ability of both aggregate operating cash flow and direct method cash flow components to be noticeably higher when the operating cash cycle is short, the firm is large, the firm is profitable, or the firm generates positive net operating cash flow. Our study employed both UK and US data, whereas the studies by Farshadfar and Monem (2013) and Arthur et al (2010) are based on data from Australia. Also, unlike our study, which uses estimates of cash flow components in predicting future cash flows, the earlier studies of Farshadfar and Monem (2013) and Arthur et al (2010) Finally, a study by Hales and Orpurt (2013) reviews all academic literature related to cash flow reporting during the past two decades, aiming to ascertain what incremental benefits might be gained by disaggregating cash flow items.…”

Section: Literature Reviewmentioning

confidence: 99%

“…The implications of these methods for prediction of operating cash flow (OCF) have been studied in the accounting literature. Most studies (e.g., Dechow, 1994;Cheng et al, 1996;Barth et al, 2001;Orpurt and Yoonseok, 2009;Arthur et al, 2010;Hales and Orpurt, 2013;Farshadfar and Monem, 2013;Christodoulou and McLeay, 2014) have shown that cash flow is a fundamental tool for evaluating firm value and a potent mechanism for analysis of a firm's future value. Studies conducted by Cheng and Hollie (2008), Arthur et al (2010), Hales and Orpurt (2013), Farshadfar and Monem (2013), and Christodoulou and McLeay (2014) have also shown that information in the form of aggregate OCF, consisting of core and non-core components, differentially persists in terms of the future cash flow.…”

Section: Introductionmentioning

confidence: 99%

“…A further study by Farshadfar and Monem (2013) provides evidence that disaggregating operating cash flow into its components improves the predictive ability of aggregate operating cash flow in forecasting future cash flows for up to a four-year forecast horizon. They also found that cash received from customers and cash paid to suppliers and employees complement each other in improving the overall predictive ability of cash flow components.…”

Section: Literature Reviewmentioning

confidence: 99%

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Cash flow disaggregation and prediction of cash flow

Khansalar

Namazi

2017

JAAR

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Purpose -This paper aims to investigate the incremental information content of estimates of cash flow components in predicting future cash flows.Design/methodology/approach -The authors examine whether models incorporating components of operating cash flow (OCF) from income statements and balance sheets using the direct method are associated with smaller prediction errors than models incorporating core and non-core cash flow.Findings -Using US and UK data and multiple regression analysis, we find that around 60% 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. 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. Research limitations/implications -

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Section: Hypotheses Development and Research Designsupporting

confidence: 78%

Section: Literature Reviewmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Section: Literature Reviewmentioning

confidence: 99%

See 2 more Smart Citations

Cash flow disaggregation and prediction of cash flow

Khansalar

Namazi

2017

JAAR

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show abstract

“…Frequently studies have ignored the ability of investors to estimate operating cash flow components. For example , Farshadfar and Monem (2013) recently demonstrated that the direct method predicts future cash flows more accurately than the indirect method; however, they did not include the ability of users to estimate operating cash flow components in their study.…”

Section: Chapter 1: Thesis Introductionmentioning

confidence: 99%

The informational impacts of Australian listed companies reporting the direct or indirect method statement of cash flows: cash flow disclosure

Kent¹

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This thesis examines whether cash flow disclosure under International Accounting Standard (IAS) 7 has an influence on the degree of information asymmetry incurred by market participants. We evaluate the impact of cash flow disclosure for ASX (Australian Securities Exchange) listed companies and its association with value relevance, prediction of future cash flows, earnings and cost of capital. The following three essays in this thesis demonstrate that the type of cash flow disclosure reported by ASX listed companies can change the amount of information asymmetry experienced by investors. Essay 3 examines whether the choice of cash flow disclosure under IAS 7 has an influence on the cost of capital incurred by ASX listed companies. A matched pairs sample is created using replacement to assess whether cost of debt or equity is associated with cash flow disclosure.Companies reporting the indirect method on average pay a higher cost of debt by 100 basis points iii although this result is not significantly different from companies reporting the direct method.Company size and interest coverage are both significant at a 1 per cent level in explaining the cost of debt. Return on assets (ROA) and leverage are also significant at the 10 per cent level for cost of debt.Cost of equity is examined using the Capital Asset Pricing Model (CAPM) with no evidence to suggest that cash flow disclosure is associated with a company's cost of equity. Overall, Essay 3 demonstrates that the cost of capital incurred by ASX listed companies is not related to their choice of cash flow disclosure.iv

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IAS 7 and value relevance: the direct method versus the indirect method

Kent

Birt

2021

Rev Account Stud

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The usefulness of operating cash flow and accrual components in improving the predictive ability of earnings: a re-examination and extension

Cited by 34 publications

References 34 publications

Cash flow disaggregation and prediction of cash flow

Cash flow disaggregation and prediction of cash flow

The informational impacts of Australian listed companies reporting the direct or indirect method statement of cash flows: cash flow disclosure

IAS 7 and value relevance: the direct method versus the indirect method

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