Work

Accruals and the Prediction of Future Cash Flows

Year: 2001

Type: article

Abstract: Building on the Dechow et al. (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.

Source: The Accounting Review

DOI: 10.2308/accr.2001.76.1.27

Authors: Mary E. Barth, Donald P. Cram, Karen K. Nelson

Institutions: Stanford University, California State University, Fullerton, State University of New York at Oswego, Texas Christian University

Language: English

Topic: Auditing, Earnings Management, Governance

Subfield: Accounting

Field: Business, Management and Accounting

Domain: Social Sciences

Open Access status: green

OpenAlex ID: W3122987060

FWCI: 92.25

Cites: 39

Cited by: 914

Related to: 10