Further Evidence on the Usefulness of Direct Method Cash Flow Components for Forecasting Future Cash Flows

Abstract

Based on pre-IFRS data from Australia, we provide further evidence that disaggregating operating cash flow into its components enhances the predictive ability of aggregate operating cash flow in forecasting future cash flows. We also find that cash received from customers and cash paid to suppliers and employees complement each other in enhancing the overall predictive ability of cash flow components. The results are robust to a battery of sensitivity tests, including control for industry membership, firm size, profitability, negative cash flows, and the length of the operating cash cycle. Our results contribute to the policy debate as to whether reporting of the direct method cash flow statement should be mandatory.