Cash flow disaggregation and prediction of cash flow

Ehsan Khansalar and Mohammad Namazi

Journal of Applied Accounting Research, 2017, vol. 18, issue 4, 464-479

Abstract: Purpose - The purpose of this paper is to investigate the incremental information content of estimates of cash flow components in predicting future cash flows. Design/methodology/approach - The authors examine whether the models incorporating components of operating cash flow from income statements and balance sheets using the direct method are associated with smaller prediction errors than the models incorporating core and non-core cash flow. Findings - Using data from US and UK firms and multiple regression analysis, the authors find that around 60 per cent of a current year’s cash flow will persist into the next period’s cash flows, and that income statement and balance sheet variables persist similarly. The explanatory power and predictive ability of disaggregated cash flow models are superior to that of an aggregated model, and further disaggregating previously applied core and non-core cash flows provides incremental information about income statement and balance sheet items that enhances prediction of future cash flows. Disaggregated models and their components produce lower out-of-sample prediction errors than an aggregated model. Research limitations/implications - This study improves our appreciation of the behaviour of cash flow components and confirms the need for detailed cash flow information in accordance with the articulation of financial statements. Practical implications - The findings are relevant to investors and analysts in predicting future cash flows and to regulators with respect to disclosure requirements and recommendations. Social implications - The findings are also relevant to financial statement users interested in better predicting a firm’s future cash flows and thereby, its firm’s value. Originality/value - This paper contributes to the existing literature by further disaggregating cash flow items into their underlying items from income statements and balance sheets.

Keywords: Balance sheet; Accruals; Articulation of financial statements; Cash flow statement; Core and non-core cash flows; Income statement; Prediction of future cash flows (search for similar items in EconPapers)
Date: 2017
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (text/html)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (application/pdf)
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eme:jaarpp:jaar-02-2015-0011

DOI: 10.1108/JAAR-02-2015-0011

Access Statistics for this article

Journal of Applied Accounting Research is currently edited by Associate Professor Orthodoxia Kyriacou

More articles in Journal of Applied Accounting Research from Emerald Group Publishing Limited
Bibliographic data for series maintained by Emerald Support ().