The Effects of Financial Statement Information Proximity and Feedback on Cash Flow Forecasts

Contemporary Accounting Research, Vol. 27, No.1, 2010

42 Pages Posted: 5 May 2008 Last revised: 13 May 2014

See all articles by Frank D. Hodge

Frank D. Hodge

University of Washington - Michael G. Foster School of Business

Patrick E. Hopkins

Indiana University - Kelley School of Business - Department of Accounting

David A. Wood

Brigham Young University - School of Accountancy

Date Written: April 30, 2008

Abstract

The Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB), in their joint Financial Statement Presentation project, are reconsidering the basic format of financial statements. The Boards' preliminary discussions related to this joint project indicate that they intend to modify the required financial statements to increase the proximity of performance-related information for each reported period, but also to reduce the number of reported periods. We provide evidence related to each of these potential changes by investigating the effects of financial-statement information proximity and the number of periods of reported performance on investors' ability to learn the forecast-relevant time-series properties of reported cash flows and accruals. Our experimental results suggest that nonprofessional investors are able to more quickly learn the relation between current period cash flows and accruals and future cash flow realizations when financial-statement information is presented in a single statement rather than separated into two statements. In addition, we find that nonprofessional investors exhibit lower levels of absolute forecast errors and less forecast dispersion when financial-statement information is unified into a single statement. Interestingly, we find that decreasing the number of periods of reported information from three to one does not negatively impact nonprofessional investor learning and prediction performance, both in terms of forecast errors and forecast dispersion. Overall, our results provide useful information related to the design of effective financial statement presentation format.

Keywords: proximity, feedback, financial statement format, cash flows, forecasting, judgment and decision making

JEL Classification: G12, G29, M41, M44, C91

Suggested Citation

Hodge, Frank Douglas and Hopkins, Patrick E. and Wood, David A., The Effects of Financial Statement Information Proximity and Feedback on Cash Flow Forecasts (April 30, 2008). Contemporary Accounting Research, Vol. 27, No.1, 2010, Available at SSRN: https://ssrn.com/abstract=1127782

Frank Douglas Hodge

University of Washington - Michael G. Foster School of Business ( email )

Paccar Hall 540, Box 353200
Seattle, WA 98195-3200
United States
206-616-8598 (Phone)
206-685-9392 (Fax)

Patrick E. Hopkins (Contact Author)

Indiana University - Kelley School of Business - Department of Accounting ( email )

Kelley School of Business
1309 E. 10th Street
Bloomington, IN 47405
United States
812-855 2617 (Phone)
812-855 8679 (Fax)

David A. Wood

Brigham Young University - School of Accountancy ( email )

518 TNRB
Brigham Young University
Provo, UT 84602
United States
801-422-8642 (Phone)
801-422-0621 (Fax)

HOME PAGE: http://marriottschool.byu.edu/employee/employee.cfm?emp=daw44

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