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Author: Timothy R. Yoder Publisher: ISBN: Category : Languages : en Pages : 45
Book Description
Prior studies on the incremental predictive ability of accrual models over cash flow models with respect to future cash flows have led to conflicting results. This paper presents an accrual-based cash flow prediction model based on a random walk in cash flows adjusted for the reversal of current payables and receivables. Results indicate that this simple accrual model predicts future cash flows (out-of-sample) better than models based on current cash flows alone. This paper also provides a more sophisticated accrual model by extending the model of the accrual process developed by Barth, Cram, and Nelson (2001) to include cash flow implications of growth in future sales. This more sophisticated accrual-based prediction model estimated via WLS (while pooling the prior three years of observations) predicts future cash flows better than both the simple accrual reversal model and the cash flow-based models, indicating that the accrual model contains information about future cash flow beyond the simple mechanical reversal of accruals. One explanation is that accruals may contain information regarding future sales. Consistent with this explanation, the paper finds that the accrual-based WLS model is superior to the cash flow-based model in capturing the effect of future sales on future cash flows. To determine whether the improved forecast accuracy is large enough to affect decision-making by financial statement users, the deciles of firms ranked on forecasted cash flow are compared to the deciles of firms ranked on actual future cash flow. The accrual-based model is superior to the cash flow-based model in placing firms into the correct deciles of actual future cash flow.
Author: Timothy R. Yoder Publisher: ISBN: Category : Languages : en Pages : 45
Book Description
Prior studies on the incremental predictive ability of accrual models over cash flow models with respect to future cash flows have led to conflicting results. This paper presents an accrual-based cash flow prediction model based on a random walk in cash flows adjusted for the reversal of current payables and receivables. Results indicate that this simple accrual model predicts future cash flows (out-of-sample) better than models based on current cash flows alone. This paper also provides a more sophisticated accrual model by extending the model of the accrual process developed by Barth, Cram, and Nelson (2001) to include cash flow implications of growth in future sales. This more sophisticated accrual-based prediction model estimated via WLS (while pooling the prior three years of observations) predicts future cash flows better than both the simple accrual reversal model and the cash flow-based models, indicating that the accrual model contains information about future cash flow beyond the simple mechanical reversal of accruals. One explanation is that accruals may contain information regarding future sales. Consistent with this explanation, the paper finds that the accrual-based WLS model is superior to the cash flow-based model in capturing the effect of future sales on future cash flows. To determine whether the improved forecast accuracy is large enough to affect decision-making by financial statement users, the deciles of firms ranked on forecasted cash flow are compared to the deciles of firms ranked on actual future cash flow. The accrual-based model is superior to the cash flow-based model in placing firms into the correct deciles of actual future cash flow.
Author: Nikolay Draganov Publisher: GRIN Verlag ISBN: 3346463400 Category : Business & Economics Languages : en Pages : 62
Book Description
Master's Thesis from the year 2021 in the subject Business economics - Accounting and Taxes, grade: 1,0, University of Cologne, language: English, abstract: The primary aim of this study is to empirically examine the relative ability of accounting earnings and cash flow to predict future cash flow. Moreover, the role of accruals in cash flow predictions is called into question. One of the major purposes of financial reporting consists in ensuring an informational basis that helps investors, creditors and other users of accounting data to overcome the uncertainty associated with the future cash flows of enterprises their financial activity relates to. At the same time, the accrual concept prevails in modern accounting, since it is theorized to mitigate the mismatching and timing problems of the unrefined cash ba-sis accounting. Hence, recognizing revenues and expenses in the period when they have occurred, and not when cash was received or paid out, should create a more relevant framework for decision making. The use of accrual accounting earnings as a summary measure of financial performance instead of the more primitive cash flows is therefore advocated by accounting standard setters. For instance, the Financial Accounting Stand-ard Board claims that: “Information about enterprise earnings and its components measured by accrual accounting generally provides a better indica-tion of enterprise performance than information about current cash receipts and pay-ments”. The FASB’s statement led to a rising discussion in the financial research on whether accounting earnings provide a more reliable picture of a company’s future operating cash flows than current operating cash flows themselves do. Hence, a major implication of the above quotation refers to the incremental power of accruals and its components in predicting future cash flows beyond the one contained into current operating cash flows. This debate represents a cornerstone in evaluating the information quality offered by the accrual accounting concept.
Author: Mary E. Barth Publisher: ISBN: Category : Languages : en Pages :
Book Description
Building on the Dechow, Kothari, and Watts (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.Key Words: Accruals, Cash flow, Earnings, Cash flow prediction.
Author: Aliasghar Mottaghi Publisher: ISBN: Category : Languages : en Pages :
Book Description
This study investigates the predictive ability of current and past cash flows with respect to the estimation of future cash flow, and compares this predictive ability with that of current and past earnings. Future cash flow is estimated in this study on the basis of a model hierarchy that initially incorporates aggregated predictors and then their disaggregated components, with the objective of improving on conventional research design with respect to the problematic issues surrounding missing values in source databases, extreme values in the sampled data and variability in fiscal year length. In determining whether the disaggregation of earnings into cash flow, accruals and their components adds to the predictive ability of cash flow, the present thesis also documents out-of-sample accuracy tests for the UK based on initial in-sample estimations, with accruals being computed using both the information in the Statement of Cash Flows and the information that may be derived from Balance Sheet changes. Using the information in the Statement of Cash Flows, the results of the in-sample estimation indicate that, whilst there is no notable difference between the ability of cash flow and aggregate earnings to predict future cash flow, the disaggregation of earnings into cash flow and accruals improves the prediction. The out-of-sample accuracy tests confirm the standard result that this disaggregated earnings model is a better predictor of future cash flow. In contrast, this thesis shows that, when using information in the Balance Sheet, by way of changes from one period to the next, the results of both the in-sample estimation and the out-of-sample accuracy tests show that disaggregated earnings is unable to outperform aggregate earnings in predicting future cash flow. Nevertheless, when the total accrual is further disaggregated into its deferral and accrual components, in-sample estimation reveals additional improvement in predictive ability, using each of the two sources of information to compute total accruals (the Statement of Cash Flows and Balance Sheet changes), although this is less evident with the out-of-sample tests. Whilst further analysis indicates that disaggregation is more informative when the firm size is large, the magnitude of accruals is low and the firm reports a positive CFO and EBIT, the thesis shows that the ability of the estimation models to predict future cash flow differs across industries in the UK, and that the findings are generally sensitive to the effect of database choice, the fiscal year length, and the identification and treatment of unrecorded data.
Author: Suresh Nallareddy Publisher: ISBN: Category : Languages : en Pages : 56
Book Description
This paper reconciles conflicting evidence in prior literature on the relative ability of earnings and cash flows in predicting future cash flows. Further, we investigate the implications of temporal shifts in accrual properties and operating environment for cash flow predictability. Three key insights emerge. First, cash flows consistently outperform earnings in predicting future cash flows. Second, accruals and its components, including those capturing non-articulating events, have incremental (albeit small) predictive ability over cash flows. Third, earnings' ability to predict future cash flows has increased over the period 1989-2015, due to changes in operating environment rather than accrual properties.
Author: Richard M. Frankel Publisher: ISBN: Category : Languages : en Pages :
Book Description
Our goal is to understand the extent to which cash-flow properties explain accruals. Using the Dechow et al. (1998) model, we derive a negative relation between accruals and cash-flow changes and show that the strength of the relation is linked to negative serial correlation in cash-flow changes. Dechow et al. also suggest that the strength of the relation between accruals and revenue changes relates to operating-cycle length. Prior accrual models have not incorporated these theoretical relations. We show that incorporating cash-flow changes, serial correlation in cash-flow changes, and operating-cycle length increases explanatory power of all accrual models considered (i.e., Jones; Ball and Shivakumar; McNichols; and Jeter and Shivakumar). We find that incorporating these variables in accrual models also improves specification and power, aids detection of earnings management in AAER firms, and produces a nondiscretionary-accrual estimate that better predicts future cash flows and earnings. These results suggest the importance of considering the economic role of accruals when predicting accruals.
Author: Francois Brochet Publisher: ISBN: Category : Languages : en Pages : 55
Book Description
We revisit the role of the cash and accrual components of accounting earnings in predicting future cash flows using out-of-sample predictions, firm-specific regression estimates, and different levels of aggregation of the dependent variable, with market value of equity as a proxy for all future cash flows. We find that, on average, accruals improve upon current cash flow from operations in predicting future cash flows. As accruals' contribution to the prediction of future cash flows varies significantly across firm-quarters, we proceed to investigating determinants of accruals' predictive ability for future cash flows. We find that positive accruals are more likely to improve upon current cash flow in predicting future cash flows. Accruals' contribution is also increasing in cash flow volatility and decreasing in the magnitude of discretionary accruals and of special items. Finally, portfolios formed on stock return predictions using information from current CFO and accruals yield significantly positive returns on average, as opposed to CFO alone. Hence, investors using predictions based on current accounting data to pick stocks are better off taking accruals into account. We also find that Sloan's (1996) accrual anomaly is related to our accrual contribution anomaly. Indeed, when accruals' contribution to future cash flow prediction is the highest, the accrual anomaly vanishes.
Author: Mary E. Barth Publisher: ISBN: Category : Languages : en Pages : 44
Book Description
We find, as predicted, that the differential ability of accrual and cash flow components of earnings to help forecast future abnormal earnings and the persistence of the components results in the components having different valuation implications. We base our tests on Ohlson (1999) applied to fourteen industries. We find: (1) Accruals and cash flows aid in forecasting future abnormal earnings incremental to abnormal earnings and equity book value. (2) Accruals and cash flows provide explanatory power for equity market value incremental to equity book value and abnormal earnings. (3) There is evidence that accruals and cash flows valuation coefficients are consistent with the Ohlson model.
Author: Ehsan Khansalar Publisher: ISBN: Category : Languages : en Pages :
Book Description
In empirical financial accounting research, there continues to be a debate as to what the best predictors of future earnings and future cash flows might be. Past accruals, earnings and cash flows are the most common predictors, but there is no consensus over their relative contributions, and little attention to the underlying accounting identities that link the components of these three prominent variables. The aim of this thesis is to investigate this controversy further, and to apply an innovative method which yields consistent estimations of future earnings and cash flows, with higher precision and greater efficiency than is the case in published results to date. The estimation imposes constraints based on financial statement articulation, using a system of structural regressions and a framework of simultaneous linear equations, which allows for the most basic property of accounting - double entry book-keeping - to be incorporated as a set of constraints within the model. In predicting future cash flows, the results imply that the constrained model which observes the double entry condition is superior to the models that are not constrained in this way, producing (a) rational signs consistent with expectations, not only in the entire sample but also in each industry, (b) evidence that double entry holds, based on the Wald test that the estimated marginal responses sum to zero, and (c) confirmation of model improvement by way of a higher likelihood and greater precision attached to predictor variables. Furthermore, by then using an appropriately specified model that observes the double entry constraint in order to predict earnings, the thesis reports statistically significant results, across all industries, that cash flows are superior to accruals in explaining future earnings, indicating also that accruals with a lower level of reliability tend to be more relevant in this respect.
Author: Timothy R. Yoder
Author: Timothy R. Yoder
Author: Nikolay Draganov
Author: Mary E. Barth
Author: Aliasghar Mottaghi
Author: Shadi Farshadfar
Author: Suresh Nallareddy
Author: Richard M. Frankel
Author: Francois Brochet
Author: Mary E. Barth
Author: Ehsan Khansalar