Do the components of cash flow and accruals enhance the forecast of future cash flows? Australian evidence

Abstract

This paper investigates the role of operating cash flow components and accrual components in forecasting future cash flows. Based on a sample of 348 Australian firms over 1992-2004 (4,520 firm-years), we find that cash flow components, reported under the direct method, enhance the predictive ability of cash flow from operations. We also find accrual components provide incremental predictive ability beyond that provided by the direct cash flow data. Further, disaggregating earnings into the components of both cash flow and accruals enhances the ability of earnings to forecast future cash flows. These results are robust to several control factors, including the length of the operating cash cycle, industry membership, firm profitability and firm size.