The Persistence of Cash Flow Components into Future Cash Flows

32 Pages Posted: 8 May 2004

See all articles by C.S. Agnes Cheng

C.S. Agnes Cheng

Hong Kong Polytechnic University - School of Accounting and Finance

Dana Hollie

The University of Toledo

Date Written: October 17, 2005

Abstract

We examine the persistence of cash flow components in predicting future cash flows. In this study, we evaluate six cash flow components (which parallels the direct method of the cash flow statement): cash flows related to sales, cost of goods sold, operating expenses, interest, taxes, and other. Consistent with our predictions, we find that the cash flow components from various operating activities persist differentially. We find that cash related to sales, cost of goods sold, operating expenses and interest persists a great deal into future cash flows; cash related to other has lower persistence; and cash related to taxes has no persistence. We then incorporate accrual components into our persistence regression model and find that the persistence of cash flow components are generally higher than those of accruals; however, accrual components do enhance model performance. Our findings are consistent with the AICPA's and financial analysts' rationale for their recommendation that the financial effects of a company's core and non-core cash flows should be distinguished. We also corroborate prior research that both direct and indirect methods of reporting cash flows can be useful for assessing future cash flows. Our findings are relevant to financial statement users and regulators who are interested in better predicting future cash flows and researchers using cash flow prediction models to measure financial reporting quality.

Keywords: Cash Flows, Cash Flow Prediction, Cash Flow Persistence, Core Cash Flows, Cash Flow Variability

JEL Classification: G29, M41

Suggested Citation

Cheng, C.S. Agnes and Hollie, Dana, The Persistence of Cash Flow Components into Future Cash Flows (October 17, 2005). Available at SSRN: https://ssrn.com/abstract=541293 or http://dx.doi.org/10.2139/ssrn.541293

C.S. Agnes Cheng

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

M715, Li Ka Shing Tower
Hung Hom, Kowloon, Kowloon
Hong Kong

Dana Hollie (Contact Author)

The University of Toledo ( email )

College of Business and Innovation
Stranahan Hall 3046
Toledo, OH 43606
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
1,118
Abstract Views
4,099
rank
18,188
PlumX Metrics