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Title: The effect of cash flow presentation method on investors' forecast of future cash flows
Authors: Pornupatham, Sompong
Tan, Hun-Tong
Vichitsarawong, Thanyaluk
Yoo, G-Song
Keywords: Business::Accounting
Issue Date: 2023
Source: Pornupatham, S., Tan, H., Vichitsarawong, T. & Yoo, G. (2023). The effect of cash flow presentation method on investors' forecast of future cash flows. Management Science, 69(3), 1877-1900.
Journal: Management Science
Abstract: The decision usefulness of the direct versus indirect presentation method of a cash flow statement has been a long-standing issue in both practice and accounting research. By capitalizing on comparative advantages of experimental methods, we provide insights into how investors process the information contained in different presentation methods to make cash flow forecasts, especially in the context of various types of nonrecurring items. We predict and find that, when nonrecurring accrued expenses are present, the indirect method leads to lower forecast errors by activating investors’ underlying knowledge structures of operating cash flows in terms of an accrual (versus cash) basis. We also find that, in the presence of nonrecurring cash or nonrecurring accrued revenues, there is no difference in forecast errors between the indirect and direct methods. Moreover, we find that the combination of the direct and indirect methods (the direct-plus-indirect method) leads to lower forecast errors than the direct method, but it does not provide an incremental benefit for forecast accuracy beyond the indirect method.
ISSN: 0025-1909
DOI: 10.1287/mnsc.2022.4406
Schools: Nanyang Business School 
Rights: © 2022 INFORMS. All rights reserved.
Fulltext Permission: none
Fulltext Availability: No Fulltext
Appears in Collections:NBS Journal Articles

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