Prediction Of Future Cash Flows Research Articles

THE ABILITY OF GROSS PROFIT, OPERATING PROFIT, NET PROFIT, AND WORKING CAPITAL IN PREDICTING FUTURE CASH FLOWS (Empirical Study of Companies Listed in the Jakarta Islamic Index)

Users of financial statements make forecasts regarding the future situation of the entity in order to anticipate opportunities and identify potential risks. Gross profit, operating profit, net profit, and working capital are important pieces of information for investors because they allow for the prediction of future cash flows. However, for companies listed on the Jakarta Islamic Index, there is instability in gross profit, operating profit, net profit, and working capital, which leads to changes in cash flow. The research is of an associative quantitative nature, with a research population consisting of 50 companies listed on the Jakarta Islamic Index from 2019 to 2022. By using a purposive sampling technique, a sample of 24 companies was obtained, resulting in a total sample size of 96 samples over the span of 4 years. The data used is secondary data, collected through the official IDX website at www.idx.co.id. The analytical method employed is multiple linear regression. The findings of the study indicate that gross profit and working capital have a significant impact on the ability to predict future cash flows. However, operating profit and net profit do not possess the same predictive power. Furthermore, the study reveals that gross profit, operating profit, net profit, and working capital collectively contribute to the prediction of future cash flows with an impressive explanatory power of 89.3%. Keywords: gross profit, operating profit, net profit, working capital, future cash flow

The Effect of Gross Profit, Operating Profit and Net Profit on Future Cash Flow Prediction at the Company of Telecommunications Sub Sector on IDX in 2014-2019

This study was structured with the aim of knowing the effect of gross profit, operating profit and net profit on the prediction of future cash flows in telecommunications sub-sector companies listed on the Indonesian stock exchange. This research was conducted focused on the telecommunications sub-sector companies listed on the Indonesia Stock Exchange in 2014-2019. The sampling method used is purposive sampling. Through this sampling method, 5 companies were obtained that could be used as samples with a research period of 6 years. Therefore, in this study, the number of this study was 30 units of analysis. This study uses descriptive statistical analysis, correlation coefficient analysis, coefficient of determination analysis, simple regression analysis, and multiple regression analysis in analyzing all data. Testing the data used in this study is the partial t-significance test, the classical assumption test, and the F simulation test. From the research conducted, the results show that the gross profit and operating profit variables partially have no significant effect on future cash flows while the net income variable shows that partially significant effect on cash flows in the future. The variables of gross profit, operating profit and net profit simultaneously show a significant effect on future cash flows.

The prediction of future cash flows based on operating cash flows, earnings and accruals in the French context

This study investigates the aptitudes of the cash-based and accrual-based accounting data for predicting future cash flows from operations in the French context. In addition, our paper aims to investigate the effect of the economic crisis on the prediction of future cash flow. The sample consists of 61 non-financial French listed companies, using annual data over the period 1999–2016.​ The study found that, regardless of the period, the model based on the operating cash flows combined with disaggregate accruals has a stronger explanatory power for predicting future operating cash flows, compared to both earnings and operating cash flows combined with the aggregate accruals models. Moreover, our results show that the aggregation of earnings falsifies the contribution of each accrual item and, as a result, the decomposition of earnings into cash flows and disaggregate accrual enables a much more accurate explanation of future operating cash flows.

Does Human Resource Investment for Internal Control System Enhance Future Cash Flow Predictability?

Generating positive long-term cash flow is vital for a firm’s sustainability. In this paper, we consider the earnings in the forecasting of future cash flow from a human resource investment of an internal control system. Using the firms listed in the Korea Stock Exchange market from 2014 to 2018, we find that the current earnings are the components of cash flow forecasting, and this relationship is genuine in a firm equipped with sufficient internal control personnel and their experiences. These findings indicate that earnings are reliable when forecasting future cash flow for a firm with a well-operated foundation.

Short selling and future cash flow predictability of capital investment: Evidence from Australia

This study investigates whether short selling, as a market mechanism, has a disciplining function for firms’ investment efficiency, measured through the association between capital investment and future cash flows. Using a sample of large Australian listed firms, we find that short-selling activities improve the positive relationship between capital investment and future cash flow and that this effect is mainly driven by firms with a risk management committee (RMC). Additional analyses show that the disciplining function of short selling for firms’ investment efficiency varies with (i) the level of firms’ financial constraints, (ii) firms’ life cycle or (iii) CEO share incentives. The main results are robust to a batch of endogeneity tests to address the potential self-selection bias and the concern about reverse causality.

Index investors and the return of stewardship accounting

Passive asset managers, seeking to deliver investment returns that mirror market indices, now control and vote about 30% of all managed U.S. shares. When bad news surfaces, index investors do not sell a company's shares. Instead, these beneficial owners protect the value of equity investments by influencing governance practices to restore long-term value creation. Interviews with stewardship offices at leading index investment firms suggest that passive investors do not use financial accounting information to value securities. The implication of this study is that the current focus of accounting standard setting – predicated on the idea that the purpose of financial reporting is to permit prediction of future cash flows – does not meet the needs of a particular group of financial statement users who have considerable influence over the governance of leading listed companies around the world.

Cash flow disaggregation and prediction of cash flow

PurposeThe purpose of this paper is to investigate the incremental information content of estimates of cash flow components in predicting future cash flows.Design/methodology/approachThe authors examine whether the models incorporating components of operating cash flow from income statements and balance sheets using the direct method are associated with smaller prediction errors than the models incorporating core and non-core cash flow.FindingsUsing data from US and UK firms and multiple regression analysis, the authors find that around 60 per cent of a current year’s cash flow will persist into the next period’s cash flows, and that income statement and balance sheet variables persist similarly. The explanatory power and predictive ability of disaggregated cash flow models are superior to that of an aggregated model, and further disaggregating previously applied core and non-core cash flows provides incremental information about income statement and balance sheet items that enhances prediction of future cash flows. Disaggregated models and their components produce lower out-of-sample prediction errors than an aggregated model.Research limitations/implicationsThis study improves our appreciation of the behaviour of cash flow components and confirms the need for detailed cash flow information in accordance with the articulation of financial statements.Practical implicationsThe findings are relevant to investors and analysts in predicting future cash flows and to regulators with respect to disclosure requirements and recommendations.Social implicationsThe findings are also relevant to financial statement users interested in better predicting a firm’s future cash flows and thereby, its firm’s value.Originality/valueThis paper contributes to the existing literature by further disaggregating cash flow items into their underlying items from income statements and balance sheets.

Pension accounting reform and future cash flow predictability

PurposeThis paper aims to examine the association of accruals and disaggregated pension components with future cash flows and also to investigate whether investors distinguish between pension information that is recognized (SFAS 158) versus disclosed (SFAS 132).Design/methodology/approachRegression analysis is used with a proxy for expected future cash flows as the dependent variable, and the components of pension disclosures as well as controls for the 2008-2009 financial crisis as the independent variables.FindingsThe results reveal that incorporating disaggregated pension components increases the ability to predict future cash flows, and that investors attach different pricing multiples to the various components in the models. The authors also find that during the 2008-2009 financial crisis, the signs of the coefficients on these components changed. Finally, the results indicate that investors assign more significance to pension accounting information that is recognized, as opposed to disclosed, and that disclosure affects the allocation of pension assets.Originality/valueThe authors provide empirical support for the conjecture posited by Amir and Benartzi (1998) that the prediction of future cash flows will be enhanced by the incorporation of the components of pension assets and liabilities. Importantly from a standard setting perspective, the authors also find evidence that investors assign more significance to pension accounting information that is recognized in the financial statements than to pension information that is disclosed.

Future Cash Flow Predictability of Non‐IFRS Earnings: Australian Evidence

The global proliferation of reporting non‐International Financial Reporting Standards (IFRS) (pro forma) earnings has been subject to academic debate and regulatory reform. This study examines whether non‐IFRS earnings contain statistically significant information on future cash flow predictability that could be useful for investors. The study uses data from large Australian listed companies over a six‐year period (2006–11) covering three distinctive periods around the global financial crisis (GFC): pre‐GFC, GFC and post‐GFC. Results based on fixed effects panel estimation methods suggest non‐IFRS earnings do exert a significantly positive impact on future cash flow predictability but only during pre‐crisis and crisis periods.

Persistence of earnings and prediction of future cash flows: the role of timely recognition of bad news

Timely recognition of losses and expenses compared to revenues and increased values precipitates future expenses to match with current revenues. Thus, timely recognition of losses acts to reduce the persistence of earnings. However, it is expected that a more timely recognition of negative cash flows, as bad news, increase the power of earnings for predicting future cash flows. This study investigates the effects of the timely recognition of bad news (loss) versus the good news on the decrease of the persistence of earnings, and the effect of negative cash flows on forecasting future cash flows. In this study, two pooling type models and a panel type model have been used to estimate the persistence of earnings and cash flows. Seventy eight firms that were listed in the Tehran Stock Exchange during the period 2003–2010 were duly reviewed. The results of this research proved that the timely recognition of loss does not affect the persistence and the power of earnings for the purpose of forecasting future cash flows. The findings imply that conservatism does not distort persistence of earnings.

Earnings Reported under IFRS Improve the Prediction of Future Cash Flows? Evidence from European Banks

This paper examines the relative costs and benefits of International Financial Reporting Standards (IFRS) adoption in the European Union by testing the ability of earnings computed under IFRS to predict future cash flows. The study considers the contribution of net income, comprehensive income and other comprehensive income to the usefulness of earnings to predict cash flows, and it compares IFRS with domestic Generally Accepted Accounting Principles (GAAP). Evidence from a sample of Continental European banks shows that IFRS improve the ability of net income to predict future cash flows. Comprehensive income, too, provides relevant information to predict future cash flows, although with a measurement error which is higher than that in net income for greater lags of time. In our interpretation, these findings are consistent with unrealised gains and losses recognised in other comprehensive income being more transitory and volatile in nature. Overall, our results are relevant to academics and standard setters debating the merits of IFRS adoption and to those who use financial statements and adopt reported earnings to form expectations about future cash flows.

IFRS Adoption, Legal Systems and the Voluntary Disclosure of Human Capital: Cross-country Evidence from the Banking Industry

This study examines the value relevance of voluntary human capital disclosures by banks and the effect of the adoption of International Financial Reporting Standards (IFRS) on the value relevance of these disclosures. Human capital disclosures allow capital market participants to evaluate the intellectual capital of the disclosing banks, which in theory may enable market participants to assess the competitiveness of the bank’s human resource strategy and the productivity of the workforce vis-a-vis benchmark performance. While IFRS does not mandate particular form of voluntary human capital disclosures (VHCD), VHCD is expected to possess information content that is useful to market participants in their equity pricing decisions. The study is conducted using a cross-country sample of 10,199 bank-years that reported labor costs. Market participants, however, are found to relate VHCD negatively to prices and returns in common and civil law countries alike. Results also suggest that IFRS adoption reduces the value relevance of VHCD due to the abundance of alternative information provided under the more comprehensive IFRS framework that helps in the prediction of future cash flows. Finally, market participants find VHCD value relevant after IFRS adoption in common law countries potentially because it reduces uncertainty about an important determinant of the bank’s future performance. On the other hand, market participants in civil law countries view VHCD as value relevant but coming at added time and financial investment. As an application of the results to an emerging economy, the implications for the Egyptian accounting profession, banking sector and capital markets are discussed.

IFRS Adoption, Legal Systems and the Voluntary Disclosure of Human Capital: Cross-country Evidence from the Banking Industry

This study examines the value relevance of voluntary human capital disclosures by banks and the effect of the adoption of International Financial Reporting Standards (IFRS) on the value relevance of these disclosures. Human capital disclosures allow capital market participants to evaluate the intellectual capital of the disclosing banks, which in theory may enable market participants to assess the competitiveness of the bank’s human resource strategy and the productivity of the workforce vis-à-vis benchmark performance. While IFRS does not mandate particular form of voluntary human capital disclosures (VHCD), VHCD is expected to possess information content that is useful to market participants in their equity pricing decisions. The study is conducted using a cross-country sample of 10,199 bank-years that reported labor costs. Market participants, however, are found to relate VHCD negatively to prices and returns in common and civil law countries alike. Results also suggest that IFRS adoption reduces the value relevance of VHCD due to the abundance of alternative information provided under the more comprehensive IFRS framework that helps in the prediction of future cash flows. Finally, market participants find VHCD value relevant after IFRS adoption in common law countries potentially because it reduces uncertainty about an important determinant of the bank’s future performance. On the other hand, market participants in civil law countries view VHCD as value relevant but coming at added time and financial investment. As an application of the results to an emerging economy, the implications for the Egyptian accounting profession, banking sector and capital markets are discussed.

Audit Quality And Accrual Reliability: Evidence From The Korean Stock Market

This study empirically investigates whether a high-quality audit improves the reliability of the components of total accruals using earnings persistence and cash flow predictability. I find that, for firms audited by Big Four auditors, their current or noncurrent assets-related accruals, which are less reliable (“more subjective in measurement”), lead to higher earnings persistence and future cash flow predictability than those of firms audited by non-Big Four auditors. These results suggest that high-quality auditors more effectively evaluate the reasonableness of accrual measurement based on more sufficient and appropriate audit evidence, leading to enhanced accrual reliability.

THE RELATIONSHIPS OF CASH FLOWS: EVIDENCE FROM LATVIAN COMPANIES

The paper deals with the subject of relationships among the different cash flows, as well as earnings, of a company. The aim of the paper is to establish the direction and strength of mutual relationships between different cash flow measures, as well as with earnings, and to provide recommendations for the prediction of future cash flows and earnings. The methods of the research include content analysis, the calculation of relative indicators, average and median measures, as well as regression and correlation analysis. There is an empirical study of the data of 52 Latvian companies, which has resulted in testing the hypotheses put forward and substantiated in the paper. A typical Latvian enterprise relies on the operating cash flow to create the investing cash flow and does not need to rely on the external sources of financing. The author concludes that investment does pay, and, based on the assessment of results of the developed model, the investing cash flow should be used in cash flow prediction, while it should not be used in earnings prediction. The increase in financing cash flow causes a company investments to increase.

PERBANDINGAN KEAKURATAN MODEL ARUS KAS METODE LANGSUNG DAN TIDAK LANGSUNG DALAM MEMPREDIKSI ARUS KAS DAN DIVIDEN MASA DEPAN

Cash flow information of company is useful for users of financial reports as a basis for assessing a company’s ability to meet the needs of liquidity or cash flow. Cash flow information also enables users of financial statements to develop models to assess and compare the present value of future cash flows from various companies in one sector. Some previous researches on the prediction of future cash flows and dividend showed different results. This research should be repeated to examine the ability of cash flow in predicting future cash flows and dividend. The purpose of this research is to find the empirical evidence of predictive models of future cash flows and dividend.
 The samples of this study are manufacturing companies listed in Indonesia Stock Exchange (IDX). The amount of the samples are 24 companies within the period of 2009-2011. The data was collected using purposive sampling method.
 The result of this study shows that a combination of earnings and accrual is able to predict future cash flows so the indirect method is more accurate in predicting future cash flows. However, a combination of cash inflows and cash outflows using direct method is more accurate in predicting future dividend.

The role of leverage and stock-based variables in the prediction of cash flows and earnings – some evidence from India

One of the objectives of accounting reporting system is to provide the analysts a true picture of the firm’s financial position. Recognising this importance, the International Accounting Standards Board has prescribed IAS 7 (cash flow statement). Many studies have been carried out to assess the usefulness of cash flows in the prediction of future cash flows or more specifically profitability. This paper focuses on some other determinants of future profitability apart from the components of net income. It finds that the debt-equity ratio of a firm is also a deciding factor among the accrual components and past earnings.

Accruals and the prediction of future cash flows

PurposeThe purpose of this paper is to examine the comparative abilities of current period cash flows and earnings (and its components) to predict one‐year‐ahead cash flow from operations in Egypt.Design/methodology/approachThe study uses the cash flow prediction models developed by Barth, Cram, and Nelson to examine the predictive abilities of earnings and cash flows for future cash flows. The first set of prediction models uses cross‐sectional regression to compare the predictive abilities of cash flows and aggregate earnings for one‐year‐ahead cash flow from operations. The second set of prediction models tests whether disaggregating earnings into cash flows and the major components of accruals enhances the predictive ability of earnings for one‐year‐ahead cash flow from operations.FindingsThe findings of the study reveal that aggregate earnings have superior predictive ability than cash flows for future cash flows. Also, the results reveal that disaggregating accruals into major components – changes in accounts receivable and payable, and in inventory, depreciation, amortization, and other accruals – significantly enhances predictive ability of earnings.Research limitations/implicationsThe study provides empirical evidence on the superiority of earnings in predicting future cash flows. The findings of the study should be considered in explaining the results of value relevance research Egypt. However, owing to relatively small sample size, given the thinness of the Egyptian capital market, these findings should be interpreted with caution.Originality/valueThe paper contributes to the limited body of research on the superiority of earnings and cash flows in predicting future cash flows by examining the predictive abilities of earnings and cash flows for future cash flows in Egypt as one of many emerging markets.

The role of accounting accruals for the prediction of future cash flows: evidence from Spain

The aim of this study is to determine whether accruals have information value beyond that provided by isolated current cash flows for the prediction of future cash flows. Using a sample of 4,397 Spanish companies (mostly privately held), we estimate in-sample regressions of future cash flows on isolated current cash flows and on accrual-based earnings. We then find that the out-of-sample prediction errors provided by the accrual-based earnings model are significantly lower than those obtained with the cash flows model. We also regress the decrease in prediction errors brought about by the addition of accruals on a set of firm-specific circumstances where accounting manipulation is expected. In all cases the decrease in prediction errors is significantly affected in the hypothesized direction.

Measurement in Financial Reporting

Much of the current thinking of accounting standard setters about measurement seems to be based on an idealized view of markets as being complete and in perfectly competitive equilibrium. In such conditions, there is a unique market price based on full information for every asset and liability, and there is an obvious attraction in using this price as the measure for accounting. This explains the apparent enthusiasm for single ideal measurement methods based on market price, such as fair value (FV), defined in SFAS 157 as a market selling price...