Accruals and the Prediction of Future Cash Flows

Posted: 13 Dec 2000

See all articles by Mary E. Barth

Mary E. Barth

Stanford University - Graduate School of Business

Donald P. Cram

State University of New York, Oswego

Karen K. Nelson

Texas Christian University - Department of Accounting

Multiple version iconThere are 2 versions of this paper

Abstract

Building on the Dechow, Kothari, and Watts (1998) model of the accrual process, this study investigates the role of accruals in predicting future cash flows. The model shows that each accrual component reflects different information relating to future cash flows; aggregate earnings masks this information. As predicted, disaggregating accruals into major components - change in accounts receivable, change in accounts payable, change in inventory, depreciation, amortization, and other accruals - significantly enhances predictive ability. Each accrual component, including depreciation and amortization, is significant with the predicted sign in predicting future cash flows, incremental to current cash flow. The cash flow and accrual components of current earnings have substantially more predictive ability for future cash flows than several lags of aggregate earnings. The inferences are robust to alternative specifications, including controlling for operating cash cycle and industry membership.

Key Words: Accruals, Cash flow, Earnings, Cash flow prediction

JEL Classification: G12, M41, M44

Suggested Citation

Barth, Mary E. and Cram, Donald P. and Nelson, Karen K., Accruals and the Prediction of Future Cash Flows. As published in The Accounting Review, January 2001. Available at SSRN: https://ssrn.com/abstract=240640

Mary E. Barth (Contact Author)

Stanford University - Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-723-9040 (Phone)
650-725-0468 (Fax)

Donald P. Cram

State University of New York, Oswego ( email )

307 Rich Hall
Oswego, NY 13126
United States
315-312-2533 (Phone)

Karen K. Nelson

Texas Christian University - Department of Accounting ( email )

M.J. Neeley School of Business
TCU Box 298530
Fort Worth, TX 76129
United States
817-257-7567 (Phone)

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