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Cash flow disaggregation and prediction of cash flow

Ehsan Khansalar (Department of Accounting Finance and Informatics, Kingston University, Kingston, UK)
Mohammad Namazi (Shiraz University, Shiraz, Iran)

Journal of Applied Accounting Research

ISSN: 0967-5426

Article publication date: 13 November 2017

1390

Abstract

Purpose

The purpose of this paper is to investigate the incremental information content of estimates of cash flow components in predicting future cash flows.

Design/methodology/approach

The 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.

Findings

Using 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/implications

This 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 implications

The findings are relevant to investors and analysts in predicting future cash flows and to regulators with respect to disclosure requirements and recommendations.

Social implications

The 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/value

This paper contributes to the existing literature by further disaggregating cash flow items into their underlying items from income statements and balance sheets.

Keywords

Citation

Khansalar, E. and Namazi, M. (2017), "Cash flow disaggregation and prediction of cash flow", Journal of Applied Accounting Research, Vol. 18 No. 4, pp. 464-479. https://doi.org/10.1108/JAAR-02-2015-0011

Publisher

:

Emerald Publishing Limited

Copyright © 2017, Emerald Publishing Limited

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