Forecasting Ability of Operating Cash, Net Income and Income Components

Document Type : Review Paper

Abstract

The present study intends to evaluate the ability of operating cash flow, net income, and earning components in forecasting future cash flow. In this regard, three hypotheses have been formulated. The first hypothesis compares the power of operating cash flow with net profit in forecasting future cash flows. The second hypothesis addresses the income as accrual and cash components and evaluates the effect of these two components on the explanatory power of income. In the third hypothesis, all accruals are divided into their components, namely, discretionary and non-discretionary accruals, and the forecasting power of income is evaluated based on this division. For estimating the research models, the financial information of 107 companies spanning from 2007-2015 was investigated through panel data analysis. The study results showed that net income better forecasts future cash flow compared to operating cash flow. Moreover, the results indicated that the explanatory power of net income in predicting future cash increases upon dividing the earning into its components, namely, cash and accrual components. However, the division of accruals into discretionary and non-discretionary components cannot increase the explanatory power of earning.

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Main Subjects

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History

  • Receive Date: 30 July 2016
  • Revise Date: 08 September 2017
  • Accept Date: 20 January 2017

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