The Reliability of Accruals and the Prediction of Future Cash Flow

Ehsan Khansalar

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.

Full Text: PDF DOI: 10.5539/ijbm.v7n2p45

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International Journal of Business and Management   ISSN 1833-3850 (Print)   ISSN 1833-8119 (Online)

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