Are earnings better than cash flows at predicting future cash flows? Evidence from apples-to-apples comparisons

Ryan J. Casey and George W. Ruch ()
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Ryan J. Casey: University of Denver
George W. Ruch: University of Denver

Review of Accounting Studies, 2024, vol. 29, issue 4, No 7, 3218-3257

Abstract: Abstract We compare the abilities of earnings and cash flows to predict future cash flows. We take a novel approach in that we perform apples-to-apples comparisons of five earnings components measured on an accrual basis with their equivalents measured on a cash basis. On the one hand, we find that the operating profit component (sales net of cost of goods sold and SG&A expense) outperforms its cash-basis equivalent in predicting future cash flows. On the other hand, we find that the depreciation expense and non-operating income components underperform their cash-basis equivalents in predicting future cash flows. Additionally, we fail to find significant differences between the predictive abilities of the interest expense and income tax expense components and their cash-basis equivalents. The inconsistent findings across earnings components suggest that unequivocal all-or-nothing conclusions on the relative predictive abilities of earnings and cash flows are unwarranted.

Keywords: Cash flows; Earnings; Predictive ability; FASB (search for similar items in EconPapers)
JEL-codes: G11 G12 G17 M41 M48 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s11142-023-09805-5

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