An Accounting Accruals Model to Predict Future Operating Cash Flows: Evidence from Brazil

This study investigates the capacity of profits, operating cash flows and accruals to predict future operating cash flows. The analysis is guided by the model developed by Barth, Cram and Nelson (2001), which is based on the model by Dechow et al. (1998). The research is based on the cash flow statements published by 29 Brazilian companies with ADRs (American Depositary Receipts), between 1999 and 2005. The results found indicate that: (1) the current operating cash flow present greater predictive capacity than aggregate profit; that (2) the disaggregation of current earnings into operating cash flow and aggregate accruals indicates that accruals add to the current operating cash flow's predictive capacity; and that (3) current earnings disaggregated into operating cash flow and various accrual components has greater capacity to predict future operating cash flows than the aggregate accruals model. Introduction The relevance of accounting information, considered as such when the information is timely, has predictive value and/or provides feedback to external users, has been analyzed in Brazilian and international studies. Among these, international research analyzes the capacity of accounting information to predict next period cash flows.One of the main interests in assessing a company 's next period cash flows is asset pricing, as the company 's cashflow generation capacity affects the value of its bonds. In this sense, Hendriksen and Breda (1999) affirm that knowing expected cash flows is what allows the market to set a company's share prices.In line with this assertion, the Financial Accounting Standards Board - FASB (1978) exposes that the primary objective of financial statements is to provide information in order to help investors, creditors and others to assess the amount and timing of expected cash flows.n addition, the FASB ( 1 978) affirms that past earnings are clearly superior to past cash flows in the prediction of next period cash flows. With a view to finding evidence of the relation between earnings, accruals, operating cash flow and future operating cash flow in Brazil, this study aims to answer the following research question: does earnings disaggregated into operating cash flow and accruals have greater capacity to predict future operating cash flow that aggregate earnings in Brazilian publicly -traded companies? Based on this question, the following hypothesis is adopted: aggregate earnings and earnings disaggregated into operating cashflow and accruals have the same capacity to predict future operating cash flows.Thus, this article aims to investigate if information about operating cash flow and accruals has greater capacity to predict future operating cash flows than aggregate earnings in Brazilian publicly traded companies.To answer this question, the study follows the model developed by Barth, Cram and Nelson (200 1), based on the model by Dechow et al. (1998).The article uses the positive methodological approach. Through this research, greater understanding is expected about the temporal relation between earnings, accruals and operating cash flow in Brazilian companies. The paper is organized as follows: section 2 presents a review of literature about the adopted theoretical reference framework. In section 3, the model used in the empirical research is shown. Section 4 discusses data collection and treatment. Section 5 analyzes the results, followed by the conclusions. Theoretical Foundations In some countries, the publication of the Cash Flow Statement (CFS) started in the 1980's, to replace the SCFP, the Statement of Changes in Financial Position. In this respect, Martins (1988, p. 47) comments that:[...] over time, mainly in the last ten years, large theoretical and practical studies have been done, based on different alternatives. And they have evolved towards the following conclusion: the Cash Flow statement seems to easier to understand and, consequently, more useful than the SCFP. …