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Evidence on the Usefulness of Components of Cash Flows from Operations in Predicting Future Cash Flows
Neal Arthur, The University of Sydney
Grace Ching - Hui Chuang, The University of Sydney
ABSTRACT. This paper utilizes data from a sample of firms required to provide disclosure of information on cash flows from operations (CFO) using the direct method to provide evidence on the predictive ability of cash flow components. This contrasts with the approach used in earlier research that estimates cash flow components or uses data from the set of firms which voluntarily disclose CFO using the direct method. We find evidence that receipts from customers, payments to suppliers, interest received and interest paid all have incremental information content. Further analysis indicates that the length of firms’ operating cycles also affects the predictive ability of cash flow components and substantially enhances the explanatory power of the model when current CFO alone performs poorly as a predictor for future cash flow. These results have potential relevance both to investors’ estimates of future CFO and regulators’ current deliberations on cash flow disclosure requirements.
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