THE PREDICTIVE ABILITY OF EARNINGS VERSUS CASH FLOW DATA TO PREDICT FUTURE CASH FLOWS: A FIRM-SPECIFIC ANALYSIS
Keywords:
accounting information, cash flows, earnings, future cash flows
Abstract
This study evaluated the value-relevance of accounting information (earnings and cash flows) in Indonesia to predict a firm’s future operating cash flows. The predictive usefulness of earnings and cash flows in association with future cash flows is of interest for three reasons. They include providing empirical evidence on the relevant accounting information to assess a firm’s future cash flows, information about the behavior and properties of Indonesian accounting information, and evidence of – or at least providing a basis for evaluating–the validity of the Indonesian
Accounting Standards Committee (KPSAK) assertion on the usefulness of accounting information to assess future cash flows.
The study evaluated three cash flow prediction models that employed cash flow, earnings, and a combination of earnings-cash flow variables. The models were applied on a firm-specific data set. The data used in this study were semi-annual data for the 61 sample firms (manufacturing firms)
listed in the Jakarta Stock Exchange (JSX) spanning the years 1990-1997. The results of this study supported the proposed hypothesis that cash flow data provided better information to assess a firm’s future cash flows than earnings data. Since this study employed manufacturing firms only, future research is necessary to evaluate the robustness of the results to other
populations of firms and/or by using an alternative deflator of earnings and cash flows, such as consumer price index (CPI) or market value of the firms. Further extensions of this study include additional refinements of the prediction models on an industry-specific basis and disaggregating cash flow variables into operating, investing, and financing components in order to measure the value-relevance of the statement of cash flows.
References
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_____ and P. Brown. 1968. An empirical evaluation of accounting income numbers. Journal of Accounting Research (Autumn): 159-77.
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Bernard, V. L., and T. L. Stober. 1989. predictive ability as a criterion for the evaluation of accounting data. The Accounting Review (October): 624-52.
______, and J. Thomas. 1990. Evidence that stock prices do not fully reflect the implication of current earnings for future earnings. Journal of Accounting and Economics (December): 305-340.
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_____, D. Burgstahler, and L. A. Daley. 1987. The incremental information content of accrual versus cash flows. The Accounting Review (October): 723-47.
Brown, L. D. 1993. Earnings forecasting research: Its implication for capital market research. International Journal of Forecasting 9: 295-320.
Brown, L. D., and M. S. Rozeff. 1979. Univariate time-series models of quarterly accounting earnings per share: A proposed model. Journal of Accounting Research: 179-89.
Chaney, P. K., D. C. Jeter, and C. M. Lewis. 1996. The use of Accruals in Income smoothing: A Permanent Earnings Hypothesis. Working Paper. Vanderbilt University.
Cooke, T. E., and R. S. O. Wallace. 1990. Financial disclosure regulation and its environment: A review and further analysis. Journal of Accounting and Public Policy (9): 79-110.
Dechow, P. M. 1994. Accounting earnings and cash flows as measures of firm performance: The role of accounting accruals. Journal of Accounting and Economics: 3-42.
Dechow, P. M., R. G. Sloan, and A. P. Sweeney. 1995. Detecting earnings management. The Accounting Review 70: 193-225.
Doupnik, T. S., and S. B. Salter. 1995. External environment, culture, and accounting practice: A preliminary test of a general model of international accounting development. The International Journal of Accounting (30): 189-207.
Easton, P. 1985. Accounting Earnings and Security Valuation: Empirical Evidence of the Fundamental Links. Journal of Accounting Research (Supplement): 54-77.
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Foster, G. 1977. Quarterly accounting data: Time-series properties and predictive ability results. The Accounting Review (January): 1-21.
Greenberg, R. R., G. L. Johson, and K. Ramesh. 1986. Earnings versus cash flow as a predictor of future cash flow Mmasures. Journal of Accounting, Auditing, and Finance: 266-77.
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_____, T. F. Schaefer, and G.L. Willinger. 1993. Time-series properties and predictive ability of funds flow variables. The Accounting Review (January): 151-63.
_____, and G. L. Willinger. 1996. A multivariate time-series prediction model for cashflow data. The Accounting Review (January): 81-101.
Machfoedz, M. 1994. The Usefulness of Financial Ratios in Indonesia (Unpublished Dissertation). University of Kentucky.
Murdoch, B., and P. Krause. 1989. An empirical investigation of the predictive power of accrual and cash flow data in forecasting operating cash flow. Akron Business and Economics Review (Fall): 100-13.
_____, 1990. Further evidence on the comparative ability of accounting data to predict operating cash flows. The Mid-Atlantic Journal of Business (Winter): 1-13.
Neill, J. D. et al. 1991. The usefulness of cash flow data: A review and synthesis. Journal of Accounting Literature (Fall): 117-50.
Ndubizu, G. A. 1992. Accounting disclosure methods and economic development: A criterion for globalizing capital markets. The International Journal of Accounting (27): 151-63.
Ohlson, J. 1990. A synthesis of security valuation theory and the role of dividends, cash flows, and earnings. Contemporary Accounting Research (Spring): 648-76.
Pariwayati, and Z. Baridwan. 1998. Kemampuan laba dan arus kas dalam memprediksi laba dan arus kas perusahaan go publik di Indonesia. Jurnal Riset Akuntansi Indonesia. Vol. 1 No. 1. Januari: 1-11.
Rayburn, J. 1986. The association of operating cash Flow and accruals with security returns. Journal of Accounting Research (Supplement): 112-33.
Saudagaran, S. M., and J. G. Diga. 1997. Financial reporting in emerging capital markets: Characteristics and policy issues. Accounting Horizons (June): 41-64.
Setiawati, L. (1995). Kandungan Nilai Informasi Pengumuman Laba: Studi Kasus pada Bursa Efek Jakarta. (Unpublished Thesis S1). Yogyakarta: Faculty of Economics, G.M.U.
Sloan, R. G. 1996. Do stock prices fully reflect information in accruals and cash flows about future earnings? The Accounting Review (July): 289-316.
Sugiyanto, C. 1998. Price linkages in selected Indonesian financial market. Kelola Gadjah Mada University Business Review 17 (January): 50-60.
Supriyadi. 1998. The Association between Accounting Information and Future Cash Flows: An Indonesian Case Study (Unpublished Dissertation). University Of Kentucky.
Sutton, M. H. 1997. Financial reporting in U.S. capital markets: International dimensions. Accounting Horizons (June): 96-102.
Watts, R. L., and J. L. Zimmerman. 1986. Positive Accounting Theory. New Jersey: Prentice-Hall, Inc.
Watts, R. L., and R. W. Leftwich. 1977. The time-series of annual accounting earnings. Journal of Accounting Research: 253-71.
Wilson, G. P. 1986. The relative information content of accruals and cash flows: Combined evidence at the earnings announcement and annual report release date. Journal of Accounting Research (Supplement): 165-200.
_____, 1987. The incremental information content of funds components of earnings after controlling for earnings. The Accounting Review (April): 293-322.
Wolk, H. I., and M. G. Tearney. 1997. Accounting Theory: A Conceptual and Institutional Approach. 4 ed. Cincinnati: South Western College Publishing Co.
Ball, R., 1992. The earnings-price anomaly. Journal of Accounting and Economics, 15: 319-45.
_____ and P. Brown. 1968. An empirical evaluation of accounting income numbers. Journal of Accounting Research (Autumn): 159-77.
Bathke, Jr. A. W., and K. S. Lorek. 1984. The relationship between time-series models and the security market’s expectation of quarterly earnings. The Accounting Review: 163-76.
Beaver, W. H., and P. A. Griffin, and W.R. Landsman. 1982. The incremental information content of replacement cost earnings. Journal of Accounting and Economics (July): 15-39.
Bernard, V. L., and T. L. Stober. 1989. predictive ability as a criterion for the evaluation of accounting data. The Accounting Review (October): 624-52.
______, and J. Thomas. 1990. Evidence that stock prices do not fully reflect the implication of current earnings for future earnings. Journal of Accounting and Economics (December): 305-340.
Bowen, R. M., D. Burgstahler, and L. A. Daley. 1986. Evidence on the relationships between earnings and various measures of cash flows. The Accounting Review (October): 713-25.
_____, D. Burgstahler, and L. A. Daley. 1987. The incremental information content of accrual versus cash flows. The Accounting Review (October): 723-47.
Brown, L. D. 1993. Earnings forecasting research: Its implication for capital market research. International Journal of Forecasting 9: 295-320.
Brown, L. D., and M. S. Rozeff. 1979. Univariate time-series models of quarterly accounting earnings per share: A proposed model. Journal of Accounting Research: 179-89.
Chaney, P. K., D. C. Jeter, and C. M. Lewis. 1996. The use of Accruals in Income smoothing: A Permanent Earnings Hypothesis. Working Paper. Vanderbilt University.
Cooke, T. E., and R. S. O. Wallace. 1990. Financial disclosure regulation and its environment: A review and further analysis. Journal of Accounting and Public Policy (9): 79-110.
Dechow, P. M. 1994. Accounting earnings and cash flows as measures of firm performance: The role of accounting accruals. Journal of Accounting and Economics: 3-42.
Dechow, P. M., R. G. Sloan, and A. P. Sweeney. 1995. Detecting earnings management. The Accounting Review 70: 193-225.
Doupnik, T. S., and S. B. Salter. 1995. External environment, culture, and accounting practice: A preliminary test of a general model of international accounting development. The International Journal of Accounting (30): 189-207.
Easton, P. 1985. Accounting Earnings and Security Valuation: Empirical Evidence of the Fundamental Links. Journal of Accounting Research (Supplement): 54-77.
Fairfield, P. M., R. J. Sweeney, and T. L. Yohn. 1996. Accounting classification and the predictive content of earnings. The Accounting Review (July): 337-55.
Financial Accounting Standards Board. 1978. Statement of Financial Accounting Concepts No. 1: Objectives of Financial Reporting by Business Enterprises. Stamford, CT: FASB.
Finger, C. A. 1994. The ability of earnings to predict future earnings and cash flow. Journal of Accounting Research (Autumn): 210-23.
Foster, G. 1977. Quarterly accounting data: Time-series properties and predictive ability results. The Accounting Review (January): 1-21.
Greenberg, R. R., G. L. Johson, and K. Ramesh. 1986. Earnings versus cash flow as a predictor of future cash flow Mmasures. Journal of Accounting, Auditing, and Finance: 266-77.
Guay, W. R., S. P. Kothari, and R. L. Watts. 1996. A Market-Based Evaluation of Discretionary-Accrual Models. Working Paper. University of Rochester, N.Y.
Hanafi, M. 1997. Informasi laporan keuangan: Studi kasus pada emiten BEJ. KELOLA Gadjah Mada University journal of Business (September) 16: 74-87.
Healy, P. M. 1985. The effect of bonus schemes on accounting decisions. The Journal of Accounting and Economics (7):85-107.
Husnan, S. 1992. Effisiensi pasar modal Indonesia. Jurnal Ekonomi Indonesia (April): 25-34.
_____, M. Hanafi, and A. Wibowo. 1996. Dampak pengumuman laporan keuangan terhadap kegiatan perdagangan saham dan variabilitas tingkat keuntungan. Kelola Gadjah Mada University Business Review 11 (May). Yogyakarta: Master of Management, G.M.U.
Ikatan Akuntan Indonesia (IAI). 1995. Pernyataan Standar Akuntansi Keuangan. Buku 1 dan 2. Jakarta, Indonesia.
Lev, B. 1989. On the usefulness of earnings and earnings research: Lessons and directions from two decades of empirical research. Journal of Accounting Research (Supplement): 153-210.
Livnat, J., and P. Zarowin. 1990. The incremental information content of cash flow components. Journal of Accounting and Economics (May): 25-46.
Lorek, K. S. 1979. Predicting annual net earnings with quarterly earnings time-series models. Journal of Accounting Research: 190-204.
_____, T. F. Schaefer, and G.L. Willinger. 1993. Time-series properties and predictive ability of funds flow variables. The Accounting Review (January): 151-63.
_____, and G. L. Willinger. 1996. A multivariate time-series prediction model for cashflow data. The Accounting Review (January): 81-101.
Machfoedz, M. 1994. The Usefulness of Financial Ratios in Indonesia (Unpublished Dissertation). University of Kentucky.
Murdoch, B., and P. Krause. 1989. An empirical investigation of the predictive power of accrual and cash flow data in forecasting operating cash flow. Akron Business and Economics Review (Fall): 100-13.
_____, 1990. Further evidence on the comparative ability of accounting data to predict operating cash flows. The Mid-Atlantic Journal of Business (Winter): 1-13.
Neill, J. D. et al. 1991. The usefulness of cash flow data: A review and synthesis. Journal of Accounting Literature (Fall): 117-50.
Ndubizu, G. A. 1992. Accounting disclosure methods and economic development: A criterion for globalizing capital markets. The International Journal of Accounting (27): 151-63.
Ohlson, J. 1990. A synthesis of security valuation theory and the role of dividends, cash flows, and earnings. Contemporary Accounting Research (Spring): 648-76.
Pariwayati, and Z. Baridwan. 1998. Kemampuan laba dan arus kas dalam memprediksi laba dan arus kas perusahaan go publik di Indonesia. Jurnal Riset Akuntansi Indonesia. Vol. 1 No. 1. Januari: 1-11.
Rayburn, J. 1986. The association of operating cash Flow and accruals with security returns. Journal of Accounting Research (Supplement): 112-33.
Saudagaran, S. M., and J. G. Diga. 1997. Financial reporting in emerging capital markets: Characteristics and policy issues. Accounting Horizons (June): 41-64.
Setiawati, L. (1995). Kandungan Nilai Informasi Pengumuman Laba: Studi Kasus pada Bursa Efek Jakarta. (Unpublished Thesis S1). Yogyakarta: Faculty of Economics, G.M.U.
Sloan, R. G. 1996. Do stock prices fully reflect information in accruals and cash flows about future earnings? The Accounting Review (July): 289-316.
Sugiyanto, C. 1998. Price linkages in selected Indonesian financial market. Kelola Gadjah Mada University Business Review 17 (January): 50-60.
Supriyadi. 1998. The Association between Accounting Information and Future Cash Flows: An Indonesian Case Study (Unpublished Dissertation). University Of Kentucky.
Sutton, M. H. 1997. Financial reporting in U.S. capital markets: International dimensions. Accounting Horizons (June): 96-102.
Watts, R. L., and J. L. Zimmerman. 1986. Positive Accounting Theory. New Jersey: Prentice-Hall, Inc.
Watts, R. L., and R. W. Leftwich. 1977. The time-series of annual accounting earnings. Journal of Accounting Research: 253-71.
Wilson, G. P. 1986. The relative information content of accruals and cash flows: Combined evidence at the earnings announcement and annual report release date. Journal of Accounting Research (Supplement): 165-200.
_____, 1987. The incremental information content of funds components of earnings after controlling for earnings. The Accounting Review (April): 293-322.
Wolk, H. I., and M. G. Tearney. 1997. Accounting Theory: A Conceptual and Institutional Approach. 4 ed. Cincinnati: South Western College Publishing Co.
Published
2018-08-08
How to Cite
Supriyadi, S. (2018). THE PREDICTIVE ABILITY OF EARNINGS VERSUS CASH FLOW DATA TO PREDICT FUTURE CASH FLOWS: A FIRM-SPECIFIC ANALYSIS. Gadjah Mada International Journal of Business, 1(2), 113-132. Retrieved from https://journal.ugm.ac.id/v3/gamaijb/article/view/13796
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