Abstract
Cash flow prediction is involved in a number of economic decisions, particularly in investment. Previous researches conducted in the United States have provided inconsistency in the results of investigating accounting data, cash flow and accrual accounting data in predicting future cash flows. No published research has studied cash flow prediction in Bangladesh. The current study investigates the ability of accrual and cash flows accounting information to predict future cash flows of Bangladeshi listed companies. This study analyses Balance sheet, Income Statement and Cash Flow statement. In addition, cash flow ratios and Income statement based ratios are calculated in order to get the same pattern of result and to make comparisons. Data used in this study are collected from the financial statements of non-manufacturing companies listed on the Stock Exchange of Bangladesh from 2001 to 2010. Cash flow data are selected directly from the cash flow statements. Empirical results show that cash flow and accrual component of earnings can be used to predict future cash flows of Bangladeshi listed companies and cash flows have better predictive power than traditional based ratios. However, the results indicate that cash flow ratios are sometimes providing the better and accurate picture of the companies. In addition, this study finds that our economic crises as well as abnormal condition of our stock market are caused due to the manipulation of accounting data for consecutive financial year.
Highlights
Cash flow information assists its financial statement users in obtaining the relevant information concerning the use and source of virtually the entire financial resources over a given time period
The purpose of this study is to provide an overview of cash flow ratios as a powerful and effective analytical tool
Beaver [1] reported that cash flow from operations (CFFO), proxied by net income plus depreciation, depletion and amortisation, to total debt had the lowest misclassification error relative to common accrual measures of financial health
Summary
Cash flow information assists its financial statement users in obtaining the relevant information concerning the use and source of virtually the entire financial resources over a given time period. Financial analysis, for a long time, depended on accounting performance via profitability measures such as return on assets and net sales to income, among others. These forms of ratios, are affected by the fundamental drawbacks that are characteristics of ‘accrual based accounting’. Most computed ratios usually focus only on balance sheets and income statements This is unfortunate since the statement of cash flows (SCF) can offer useful insights from ratio analysis. The SCF complements the balance sheet and income statement by providing additional information concerning an organization’s ability to operate efficiently, to finance growth, and to pay its obligations. The purpose of this study is to provide an overview of cash flow ratios as a powerful and effective analytical tool
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