On earnings and cash flows as predictors of future cash flows

Ray Ball () and Valeri V. Nikolaev

Journal of Accounting and Economics, 2022, vol. 73, issue 1

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.

Keywords: Operating cash flow; Free cash flow; Cash flow forecasts; Accruals; FASB; Firm cross-sectional heterogeneity (search for similar items in EconPapers)
JEL-codes: G11 G12 G17 M41 M48 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jaecon:v:73:y:2022:i:1:s0165410121000458

DOI: 10.1016/j.jacceco.2021.101430

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