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Can Current Earnings Predict Future Cash Flows? A Literature Survey

Author Affiliations

  • 1Lahore School of Economics, PAKISTAN
  • 2 Lahore University of Management Sciences, PAKISTAN

Res. J. Recent Sci., Volume 2, Issue (2), Pages 76-80, February,2 (2013)


Investors consider cash flows to be more value relevant than profitability disclosures. This value relevance emerges from low discretionary control of managers on cash flows compared to net income. The accrual accounting is based on recognizing revenues and expenses as they occur and not when the cash transaction takes place. This will result in a variance of net income from cash flows. However, given the nature of accounting system, in general it is assumed that earnings and cash flows are co integrated. As a result, an exhaustive literature exists that attempts to explore the capacity of current earnings in predicting future cash flows of a firm. The findings on the subject are mixed with some studies validating the hypothesis that earnings can be a good predictor of future cash flows, while others refute it questioning the value relevance of earnings. In this literature survey, we present and discuss some notable findings on this important financial issue.


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  3. Green P.J., The Impact of the Quality of Earnings on the Valuation Relevance of Cash Flow Disclosures, British Accounting Review, 31, 387413 (1999)
  4. Dechow P., Kothari S.P. and Watts R.L., The Relations between Earnings and Cash Flow, Journal of Accounting and Economics, 25, 13368 (1998)
  5. Barth M.E., Carm D.P. and Nelson K., Accruals and the Prediction of Future Cash Flows, Accounting Review,37, 2758 (2001)
  6. Greenberg R.R., Johnson G.L. and Ramesh K., Earnings versus Cash Flows as a Predictor of Future Cash Flow Measures, Journal of Accounting Auditing and Finance, 1(4), 266-77 (1986)
  7. Bowen R.M., Burgstahler D. and Daley L.A., Evidence on the Relationships between Earnings and Various Measures of Cash Flow, The Accounting Review, 86(4), 713-25 (1986)
  8. Murdoch B. and Krause P., Further Evidence on the Comparative Ability of Accounting Data to Predict Operating Cash Flows, The Mid - Atlantic Journal of Business, 26(2), 1-14 (1990)
  9. Percy M. and Stokes D.J., Further Evidence on Empirical Relationships between Earnings and Cash Flows, Accounting and Finance, 32(1), 27-49 (1992)
  10. McBeth K.H., Forecasting Operating Cash Flow: Evidence on the Comparative Predictive Abilities of Net Income and Operating Cash Flow from Actual Cash Flow Data, The Mid-Atlantic Journal of Business, 29(2), 173-87 (1993)
  11. Finger C.A., The Ability of Earnings to Predict Future Earnings and Cash Flow, Journal of Accounting Research, 32(2), 210-23 (1994)
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