The Reliability of Accruals and the Prediction of Future Cash Flow

Abstract

The aim of this study is to investigate the reliability of accruals in predicting cash flows. Three categories of accrual are considered (trading, non-trading and financial accruals), which are calculated on the basis of the balance sheet information available in the Worldscope database. Different levels of reliability are assigned to the different types of accrual dependent on their expected propensity to manipulation, using a three-point scale of reliability (low, medium and high). We expect a higher degree of reliability in financial accruals to be associated with greater predictive power with respect to cash flows, and likewise for a lower level to be associated with lower predictability in non-trading accruals, and evidence is presented that supports these predictions. [PUBLICATION ABSTRACT]