Analytical Review of Separation of Operating Cash Flow and Accruals on the Ability to Predict Future Cash flows and Profits

Abstract

The aim of this research is to specify the characteristics of normal and abnormal cash flows in conjunction with normal and abnormal accruals in predicting future cash flows and earnings, and they are used to analyze the quality of earnings. Each of cash flows and accruals are decomposed into two components, i.e. normal and abnormal. To do so, Jones and Jianming’s models (2007) are used and then the ability of these components concerning the prediction of future cash flows and earnings is studied. The research hypotheses were tested using the data elicited from six groups of the firms that participated in this research. In this research, quantitative data analysis, and descriptive and inferential estimation were used simultaneously. The gathered data, after preparation and estimation were put through Excel software program and then its final analysis was done using SPSS software. The ability of the prediction of earning components was tested by the parameters of these components. Based on the obtained results of data analysis in all of the firms, the ability of normal cash flows was more than that of abnormal cash flows in predicting future cash flows and earnings, and the ability of normal accruals was less than that of abnormal accruals in predicting future cash flows, however, it was greater than abnormal accruals in predicting future earnings.

Keywords

• Operating Cash Flow
• Normal cash flow
• Abnormal cash flow
• Normal accruals
• Abnormal Accruals