The Usefulness of Accrual Accounting in Forming Analysts’ Forecasts of Accruals and Cash Flows from Operations
57 Pages Posted: 14 Sep 2020 Last revised: 18 Sep 2020
Date Written: May 2, 2020
Recent work shows that the role of accrual accounting in mitigating the timing differences between cash flows and operating performance has been disappearing over time (Bushman, Lerman, and Zhang 2016). We argue that even though there is noise in the accrual accounting process, sophisticated users of financial information – financial analysts, are able to extract useful information from the reported accrual accounting process, and use them in their forecasting process, are able to smooth the timing differences in forecasted cash flows, and also predict future reported cash flows. We find that the analysts’ forecasts of accruals and cash flows are negatively correlated with each other, and this negative correlation has not changed over time. We also find that the ability of analysts’ accruals forecasts to predict future cash flows has not declined over time.
Keywords: Accrual accounting, analysts’ cash flow and accrual forecasts, accrual quality
JEL Classification: M40, M41, G12, G14
Suggested Citation: Suggested Citation