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Accrual Models' Incremental Predictive Ability Regarding Future Cash Flows
Timothy R Yoder,
Mississippi State University
ABSTRACT. Prior studies on the incremental predictive ability of accrual models over cash flow models with respect to future cash flows led to conflicting results. This paper presents an accrual-based cash flow prediction model based on a random walk in cash flows adjusted for the reversal of current payables and receivables. This model predicts future cash flows better than models based on current cash flows alone. This paper provides a second accrual model by extending the Barth, et al. (2001) model to include cash flow implications of growth and an accrual-based prediction of future sales. This model predicts future cash flows better than both the accrual reversal model and the cash flow-based models, indicating that the accrual model contains information about future cash flow beyond the mechanical reversal of accruals. Consistent with one explanation for this finding, the accrual model contains more information regarding future sales than the cash flow-based models.
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