Are Direct Cash Flow Disclosures Informative? A Revisit
We revisit the incremental usefulness of direct method cash flow disclosures. Prior empirical studies of U.S. firms advocate the direct method, but none fully considered all available indirect method cash flow information, warranting further study. Recent FASB, IASB and particularly CFA Institute comments about the direct method also motivate our study. In this paper, we first document errors when estimating direct method cash flow components using indirect method cash flow data (prior studies used balance sheet data), indicating that the direct method is not redundant. Second, these estimation errors are statistically significant when predicting future operating cash flows. Third, using a FERC (future ERC) methodology, we find firms voluntarily producing direct method statements reflect more information about future earnings and operating cash flows in their current stock returns than other firms. We conclude that the direct method provides incrementally useful information beyond the indirect method and other financial statement disclosures.
Accounting | Corporate Finance
Financial Performance Analysis
American Accounting Association Annual Meeting
City or Country
San Jose, CA, USA
Orpurt, Steven Francis and ZANG, Yoonseok.
Are Direct Cash Flow Disclosures Informative? A Revisit. (2006). American Accounting Association Annual Meeting. Research Collection School Of Accountancy.
Available at: http://ink.library.smu.edu.sg/soa_research/188