Do Direct Cash Flow Disclosures Help Predict Future Operating Cash Flows and Earnings

By S. Orpurt, Yoonseok Zang. 2009

150 citations recorded by the source corpus.

ABSTRACT: Motivated by recent FASB, IASB, and CFA Institute comments, we explore the predictive value of direct method cash flow disclosures. A primary stated purpose of the direct method is to better forecast future performance. To examine this purpose, we first document that direct method line items, such as cash received from customers, are not reliably estimable using income statements and either balance sheets or indirect method statements of cash flows. When these stimation (articulation) errors are included in cash flows and earnings forecasting models, forecasting performance significantly improves. In addition, employing a future ERC (FERC) methodology, we find evidence suggesting that market participants utilize direct method disclosures for their stated purpose: to better forecast future operating performance. After conducting several tests for self‐selection concerns, we conclude that the direct method is valuable to investors when forecasting future cash flows and earnings.

Subfields: Accounting, Finance, Strategy and Management

View Paper: https://www.semanticscholar.org/paper/2fd6a737fe8a8edab36cccef50a3c65b4318768f

How researchers see this paper

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In Accounting

1. Daniel B. Thornton
2. Arnt Verriest
3. Tong Yao
4. Tong Yu
5. Akiko Watanabe
6. Yan Xu
7. A. Gaeremynck
8. Shuming Liu

In Finance

1. Arnt Verriest
2. Tong Yao
3. Tong Yu
4. Akiko Watanabe
5. Yan Xu
6. Daniel B. Thornton
7. A. Gaeremynck
8. Shuming Liu

In Strategy and Management

1. Arnt Verriest
2. Daniel B. Thornton
3. Tong Yao
4. Tong Yu
5. Akiko Watanabe
6. Yan Xu
7. A. Gaeremynck
8. Klaus Derfuss

Citations in the corpus

• The Impact of Corporate Governance on IFRS Adoption Choices (2013, methodology): “Consistent with prior literature showing that disclosures of gross receipts and payments assist investors forecasting future cash flows and earnings (Orpurt and Zang, 2009), the IASB prefers firms to use the direct method.”
• The Asset Growth Effect: Insights from International Equity Markets (2013, background): “A series of accounting studies, such as Gelb and Zarowin (2002), Lundholm and Myers (2002), Tucker and Zarowin (2006), and Orpurt and Zang (2009), have shown that FERC is positively correlated with firm attributes that are indicative of informative stock prices, in particular the quality of…”