IDEAS home Printed from https://ideas.repec.org/a/inm/ormnsc/v69y2023i3p1877-1900.html
   My bibliography  Save this article

The Effect of Cash Flow Presentation Method on Investors’ Forecast of Future Cash Flows

Author

Listed:
  • Sompong Pornupatham

    (Chulalongkorn Business School, Chulalongkorn University, Bangkok 10330, Thailand)

  • Hun-Tong Tan

    (Nanyang Business School, Nanyang Technological University, Singapore 639798)

  • Thanyaluk Vichitsarawong

    (Chulalongkorn Business School, Chulalongkorn University, Bangkok 10330, Thailand)

  • G-Song Yoo

    (Korea University Business School, Seoul 02841, Korea (the Republic of))

Abstract

The decision usefulness of the direct versus indirect presentation method of a cash flow statement has been a long-standing issue in both practice and accounting research. By capitalizing on comparative advantages of experimental methods, we provide insights into how investors process the information contained in different presentation methods to make cash flow forecasts, especially in the context of various types of nonrecurring items. We predict and find that, when nonrecurring accrued expenses are present, the indirect method leads to lower forecast errors by activating investors’ underlying knowledge structures of operating cash flows in terms of an accrual (versus cash) basis. We also find that, in the presence of nonrecurring cash or nonrecurring accrued revenues, there is no difference in forecast errors between the indirect and direct methods. Moreover, we find that the combination of the direct and indirect methods (the direct-plus-indirect method) leads to lower forecast errors than the direct method, but it does not provide an incremental benefit for forecast accuracy beyond the indirect method.

Suggested Citation

  • Sompong Pornupatham & Hun-Tong Tan & Thanyaluk Vichitsarawong & G-Song Yoo, 2023. "The Effect of Cash Flow Presentation Method on Investors’ Forecast of Future Cash Flows," Management Science, INFORMS, vol. 69(3), pages 1877-1900, March.
    • Handle: RePEc:inm:ormnsc:v:69:y:2023:i:3:p:1877-1900
    DOI: 10.1287/mnsc.2022.4406
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/mnsc.2022.4406
    Download Restriction: no
    File URL: https://libkey.io/10.1287/mnsc.2022.4406?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Klammer, Thomas P. & Reed, Sarah A., 1990. "Operating cash flow formats: Does format influence decisions?," Journal of Accounting and Public Policy, Elsevier, vol. 9(3), pages 217-235.
    2. Frank D. Hodge & Patrick E. Hopkins & David A. Wood, 2010. "The Effects of Financial Statement Information Proximity and Feedback on Cash Flow Forecasts," Contemporary Accounting Research, John Wiley & Sons, vol. 27(1), pages 3-3, March.
    3. Neal Arthur & Marco Cheng & Robert Czernkowski, 2010. "Cash flow disaggregation and the prediction of future earnings," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 50(1), pages 1-30, March.
    4. Dechow, Patricia M., 1994. "Accounting earnings and cash flows as measures of firm performance : The role of accounting accruals," Journal of Accounting and Economics, Elsevier, vol. 18(1), pages 3-42, July.
    5. Frank D. Hodge & Patrick E. Hopkins & David A. Wood, 2010. "The Effects of Financial Statement Information Proximity and Feedback on Cash Flow Forecasts," Contemporary Accounting Research, John Wiley & Sons, vol. 27(1), pages 101-133, March.
    6. Nelson, Karen K. & Barth, Mary E. & Cram, Donald, 2001. "Accruals and the Prediction of Future Cash Flows," Research Papers 1594r, Stanford University, Graduate School of Business.
    7. Baljit K. Sidhu & CHUAN YU, 2021. "Direct Method Operating Cash Flow Disclosures: Determinants and Incremental Usefulness," Abacus, Accounting Foundation, University of Sydney, vol. 57(3), pages 421-467, September.
    8. 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.
    9. Michael Bradbury, 2011. "Direct or Indirect Cash Flow Statements?," Australian Accounting Review, CPA Australia, vol. 21(2), pages 124-130, June.
    10. Paul Hribar & Daniel W. Collins, 2002. "Errors in Estimating Accruals: Implications for Empirical Research," Journal of Accounting Research, Wiley Blackwell, vol. 40(1), pages 105-134, March.
    11. Alex Frino & Stewart Jones, 2005. "The Impact of Mandated Cash Flow Disclosure on Bid-Ask Spreads," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 32(7-8), pages 1373-1396.
    12. Bin Miao & Siew Hong Teoh & Zinan Zhu, 2016. "Limited attention, statement of cash flow disclosure, and the valuation of accruals," Review of Accounting Studies, Springer, vol. 21(2), pages 473-515, June.
    13. Kwok, Helen, 2002. "The effect of cash flow statement format on lenders' decisions," The International Journal of Accounting, Elsevier, vol. 37(3), pages 347-362.
    14. Alex Frino & Stewart Jones, 2005. "The Impact of Mandated Cash Flow Disclosure on Bid‐Ask Spreads," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 32(7‐8), pages 1373-1396, September.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Richard Kent & Jacqueline Birt, 2021. "IAS 7 and value relevance: the direct method versus the indirect method," Review of Accounting Studies, Springer, vol. 26(4), pages 1532-1586, December.
    2. Baljit K. Sidhu & CHUAN YU, 2021. "Direct Method Operating Cash Flow Disclosures: Determinants and Incremental Usefulness," Abacus, Accounting Foundation, University of Sydney, vol. 57(3), pages 421-467, September.
    3. Shadi Farshadfar & Reza Monem, 2013. "The usefulness of operating cash flow and accrual components in improving the predictive ability of earnings: a re-examination and extension," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 53(4), pages 1061-1082, December.
    4. Caban-Garcia, Maria T. & Choi, Heeick & Kim, Myungsun, 2020. "The effects of operating cash flow disclosure on earnings comparability, analysts' forecasts, and firms’ investment decisions during the Pre-IFRS era," The British Accounting Review, Elsevier, vol. 52(4).
    5. Farshadfar, Shadi & Monem, Reza, 2013. "Further Evidence on the Usefulness of Direct Method Cash Flow Components for Forecasting Future Cash Flows," The International Journal of Accounting, Elsevier, vol. 48(1), pages 111-133.
    6. De Andrés Fazio, Salvador & Urquía Grande, Elena & Pérez Estébanez, Raquel, 2022. "The “secret life” of the Statement of Cash Flow: A bibliometric analysis," Cuadernos de Gestión, Universidad del País Vasco - Instituto de Economía Aplicada a la Empresa (IEAE).
    7. Michael Bradbury, 2011. "Direct or Indirect Cash Flow Statements?," Australian Accounting Review, CPA Australia, vol. 21(2), pages 124-130, June.
    8. Chad R. Larson & Richard Sloan & Jenny Zha Giedt, 2018. "Defining, measuring, and modeling accruals: a guide for researchers," Review of Accounting Studies, Springer, vol. 23(3), pages 827-871, September.
    9. Bradley Blaylock & Bradley P. Lawson & Michael A. Mayberry, 2020. "Taxable income, future profitability, and stock returns," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 47(7-8), pages 858-881, July.
    10. Iain Clacher & Alan Duboisée Ricquebourg & Allan Hodgson, 2013. "The Value Relevance of Direct Cash Flows under International Financial Reporting Standards," Abacus, Accounting Foundation, University of Sydney, vol. 49(3), pages 367-395, September.
    11. Jinhan Pae, 2007. "Unexpected Accruals and Conditional Accounting Conservatism," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 34(5‐6), pages 681-704, June.
    12. Jawad Mohammad & Attiya Yasmin Javid, 2015. "An Analysis of Accrual Anomaly in Case of Karachi Stock Exchange," PIDE-Working Papers 2015:116, Pakistan Institute of Development Economics.
    13. Shadi Farshadfar & Reza M. Monem, 2019. "Further evidence of the relationship between accruals and future cash flows," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 59(1), pages 143-176, March.
    14. Maria Carmen Huian & Marilena Mironiuc & Mihaela Chiriac, 2018. "Study on the association between earnings management and value relevance based on the reporting method used for operating cash flows," The Audit Financiar journal, Chamber of Financial Auditors of Romania, vol. 16(149), pages 101-101, February.
    15. Tami Dinh Thi & Wolfgang Schultze, 2011. "Capitalizing research & development and ‘other information’: the incremental information content of accruals versus cash flows," Metrika: International Journal for Theoretical and Applied Statistics, Springer, vol. 22(3), pages 241-278, November.
    16. Li Yu (Colly) He & Sue Wright & Elaine Evans, 2018. "Is fair value information relevant to investment decision-making: Evidence from the Australian agricultural sector?," Australian Journal of Management, Australian School of Business, vol. 43(4), pages 555-574, November.
    17. Blankespoor, Elizabeth & deHaan, Ed & Marinovic, Iván, 2020. "Disclosure processing costs, investors’ information choice, and equity market outcomes: A review," Journal of Accounting and Economics, Elsevier, vol. 70(2).
    18. Mary E. Barth & Greg Clinch & Doron Israeli, 2016. "What do accruals tell us about future cash flows?," Review of Accounting Studies, Springer, vol. 21(3), pages 768-807, September.
    19. Myungsun Kim & William Kross, 2005. "The Ability of Earnings to Predict Future Operating Cash Flows Has Been Increasing—Not Decreasing," Journal of Accounting Research, Wiley Blackwell, vol. 43(5), pages 753-780, December.
    20. Pengguo Wang, 2013. "The role of disaggregation of earnings in stock valuation and earnings forecasting," Accounting and Business Research, Taylor & Francis Journals, vol. 43(5), pages 530-557, October.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:69:y:2023:i:3:p:1877-1900. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.