Information Provided by Accrual and Cash‐Flow Measures of Operating Activities

This article examines accrual and cash‐flow measures useful for observing companies' financing, investing and operating activities. It addresses the information provided jointly by income and operating cash flow, and reveals that information provided by these accounting measures is dependent on their relative magnitudes. A consistent pattern of income in excess of operating cash flow, with both measures appropriately adjusted and scaled, indicates superior company growth. Income and cash‐flow patterns are associated significantly with various company financing, investing and operating attributes. Empirical tests confirm that both income and operating cash flow are important for observing company performance and prospects when considered jointly and when interpreted with respect to accounting measurement theory. At least for many companies, the results do not support the conventional wisdoms that accounting measures of income and operating cash flow converge over long periods of time and that earnings provide a reliable basis for cash‐flow prediction.