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On earnings and cash flows as predictors of future cash flows

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  • Ball, Ray
  • Nikolaev, Valeri V.

Abstract

Do accruals-based earnings provide better information about future operating cash flows than do operating cash flows themselves, as predicted by the Financial Accounting Standards Board's conceptual framework (FASB, 1978)? While this is a foundational issue in accounting, because it addresses the information added by accrual accounting methods, testing it remains unsettled. We show that when comparing the predictive ability of operating cash flows with that of an equivalent earnings measure calculated on an accrual basis, earnings outperform operating cash flows. The result becomes more pronounced when allowance is made for cross-sectional differences in the relation between firms' earnings and future cash flows. In fact, even “bottom line” earnings then have similar explanatory power as operating cash flows.

Suggested Citation

  • Ball, Ray & Nikolaev, Valeri V., 2022. "On earnings and cash flows as predictors of future cash flows," Journal of Accounting and Economics, Elsevier, vol. 73(1).
    • Handle: RePEc:eee:jaecon:v:73:y:2022:i:1:s0165410121000458
    DOI: 10.1016/j.jacceco.2021.101430
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    Cited by:

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    2. Ryan J. Casey & George W. Ruch, 2024. "Are earnings better than cash flows at predicting future cash flows? Evidence from apples-to-apples comparisons," Review of Accounting Studies, Springer, vol. 29(4), pages 3218-3257, December.
    3. Cao, June & Huang, Zijie & Liew, Millie, 2025. "The environmental-financial nexus: Centralized environmental monitoring, eco-consciousness, and green revenues," Journal of Economic Behavior & Organization, Elsevier, vol. 231(C).
    4. Anup Srivastava, 2023. "Trivialization of the bottom line and losing relevance of losses," Review of Accounting Studies, Springer, vol. 28(3), pages 1190-1208, September.
    5. Prodosh Eugene Simlai, 2025. "Investor sophistication, investor sentiment, and cash-based operating profitability," Review of Quantitative Finance and Accounting, Springer, vol. 64(3), pages 1079-1103, April.
    6. Matthias Breuer & Ed Dehaan, 2024. "Using and Interpreting Fixed Effects Models," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 62(4), pages 1183-1226, September.
    7. Elżbieta Bukalska & Jakub Czerniak & Irmina Florek, 2025. "Does CEO Ownership in High-Tech Companies Affect Corporate Financial Decisions?," Central European Business Review, Prague University of Economics and Business, vol. 2025(4), pages 81-106.
    8. Alexey Litvinenko & Anna Litvinenko & Samuli Saarinen, 2025. "Applying Forecasting Methods to Accrual-Based and Cash-Based Ratio Analysis," Journal of Accounting and Management Information Systems, Faculty of Accounting and Management Information Systems, The Bucharest University of Economic Studies, vol. 24(2), pages 328-360, June.
    9. Yuan Liao & Xinjie Ma & Andreas Neuhierl & Zhentao Shi, 2023. "Economic Forecasts Using Many Noises," Papers 2312.05593, arXiv.org, revised Dec 2023.

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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation

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