The Study of the Incremental Predictive Ability of Accruals With Respect to Future Cash Flows

Authors

1 Assistant professor of Accounting, Mashhad Ferdowsi University, Mashhad, Iran.

2 M.A. of Accounting, Mashhad Ferdowsi University, Mashhad, Iran.

Abstract

Assessing the opportunities and the risks of commercial activities and the role of management's stewardship requires understanding the nature of business activity including how to provide and spend the cash by the entity. Balance sheet, financial performance statements and the cash flow statement both provide data on financial condition, financial performance and also the liquidity, the ability to repay the liabilities and the financial flexibility. So creating a relationship between the inserted data in the cash flow statement and the presented data in other basic financial statements is important. To predict the future cash flows, one can use the data relating to cash flow statement and also the financial data inserted in other financial statements which suggests the possibility that there is separate or combined use of accruals and cash items in predicting the future cash flows. Profit and future cash flows are the main basic data which can play an important role in fulfilling this aim. Though the cash flow statement presents some data on the business cash flows during the reported financial year, the mentioned data are not enough to predict the future cash flows.We examine 149 companies’ security & exchange commission of Tehran from 1377 until 1385.Results of this research shows that:
1) Cash flow forecast information incorporating accrual information outperforms incorporating only cash flow information.
2) The incremental predictive ability of the accrual information decreasing in the volatility of ending inventory.
3) The incremental predictive ability of the accrual information over cash flow only information will very in the volatility of sales.
4) The incremental predictive ability of the accrual information over cash flow only information volatility of firm size.

Keywords

References

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History

  • Receive Date: 23 November 2009
  • Revise Date: 10 April 2010
  • Accept Date: 13 June 2010

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