Evidence on the Usefulness of Components of Cash Flows from Operating Activities in Predicting Future Cash Flows

Abstract

This paper investigates the relevance of the actual components of Cash Flows from Operating Activities (CFO) in predicting future CFO. We find evidence that receipts from customers and payments to suppliers have incremental information content (relative to aggregate CFO) in predicting CFO. Further, utilising the disclosure of both interest received and interest paid (rather than the net interest paid or received) we find that a models incorporating both variables provide incremental information for cash flow prediction. These results remain robust after controlling for accruals information. Consistent with Dechow (1994) further tests show variation in company's operating cycles affects the predictive ability of cash flow components and also substantially enhance the explanatory power of the model when current CFO alone performs poorly as a predictor for future cash flow. These results have potential relevance to investors' concerned with estimates of future CFO and regulators current deliberations on cash flow disclosure.