Further Evidence on the Usefulness of Accruals in Predicting Future Cash Flows

• In Event: Financial Accounting Issues: International Evidence I

Abstract

We examine the relative importance of working capital accruals, non-current operating accruals, and financing accruals in the forecast of future cash flows in Australia. We provide evidence that both working capital and non-current operating accruals are important in forecasting future cash flows, but that the contribution of financing accruals is not significant. We further decompose these accruals into their underlying asset and liability components in order to identify the source of the predictive ability. Our findings suggest that the asset component of accruals plays a more important role in explaining the variation of future cash flows than the liability component of accruals. The results are robust to various control factors, including industry membership, firm profitability, pre- and post-IFRS periods, and forecast horizons of up to four years. Our findings contribute to the policy discussion as to whether accounting information on the operating, investing, and financing activities of a firm should be separated across all three financial statements.

Authors

• Shadi Farshadfar, Ryerson University

• Reza Mohammed Monem, Griffith University