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Accruals and the Prediction of Future Cash Flows

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Author Info
Nelson, Karen K.
Barth, Mary E.
Cram, Donald
Abstract

Building on the Dechow, Kothari, and Watts (1998) model of the accrual process, this study provides insights into 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 several alternative specifications, including controlling for operating cash cycle and industry membership.

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Paper provided by Stanford University, Graduate School of Business in its series Research Papers with number 1594r.

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Date of creation: Jan 2001
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Handle: RePEc:ecl:stabus:1594r

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  3. Batiz-Lazo, Bernardo, 2006. "Changes In The Depreciation Of Buildings In An English Building Society, Circa 1959: Financial And Governance Implications," MPRA Paper 4617, University Library of Munich, Germany. [Downloadable!]
  4. C. Cheng & Dana Hollie, 2008. "Do core and non-core cash flows from operations persist differentially in predicting future cash flows?," Review of Quantitative Finance and Accounting, Springer, vol. 31(1), pages 29-53, July. [Downloadable!] (restricted)
  5. Jinhan Pae, 2005. "Expected Accrual Models: The Impact of Operating Cash Flows and Reversals of Accruals," Review of Quantitative Finance and Accounting, Springer, vol. 24(1), pages 5-22, January. [Downloadable!] (restricted)
  6. Takashi Obinata, 2002. "Concept and Relevance of Income," CIRJE F-Series CIRJE-F-171, CIRJE, Faculty of Economics, University of Tokyo. [Downloadable!]
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  8. LaFond, Ryan, 2005. "Is the Accrual Anomaly a Global Anomaly?," Working papers 27856, Massachusetts Institute of Technology (MIT), Sloan School of Management. [Downloadable!]
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