Predicting Future Cash Flows: Does Cash Flow have Incremental Information over Accrual Earnings? / Tho Lai Mooi

Financial Reporting Standard No. 107 on cashflow statements in propagating
the preparation of cash flow statements as an integral part of an entity's financial
statements, has asserted that 'cash flow information is useful in assessing the
ability of enterprise to generate cash and cash equivalents...' This study attempts
to test this claim by investigating the predictive ability of cash flow from
operations versus accrual accounting based data to forecast future cashflow
from operations, using multivariate regression models and panel data on a
sample of 173 firms listed on Bursa Malaysia. Three predictor variables, net
income before extraordinary items (NI), NI plus depreciation and amortisation
(NDA) and cash flow from operations (CFO) are used to forecast future cash
flows from operations for the period from 1997 to 2005.
This study has provided evidence that cashflow from operations data do have
incremental predictive ability over accrual measures ofNI and NDA as indicated
by the significant Beta coefficients of CFOs in all the eight regression models
used. The predictive ability of all the regression models improves as more years
of historical data of predictors are incorporated. The results also show that the
accrual predictor of NDA is superior over NI in models that use only one or two
years data. However, as more than two years data are used, the superiority of
NDA over NI disappears.