Accruals and the naive out-of-sample prediction of operating cash flow

Recent evidence indicates that a naive no-change out-of-sample forecast of operating cash flow is as accurate as regression model forecasts. The current study uses this evidence to compare the accuracy of two naive cash flow forecasts: 1) a pure no-change forecast and 2) a no-change forecast which includes adjustments for changes in accounts receivable, inventory and accounts payable. The size- and accrual-matched results indicate that the naive cash flow forecast with accruals is notably more accurate than the naive forecast without accruals. Moreover, the results indicate that large sums of positive accruals are more useful for cash flow prediction than large sums of negative accruals. Overall, the study provides creditors, analysts and other members of the financial community with an efficient and effective protocol for cash flow prediction. (C) 2012 Elsevier Ltd. All rights reserved.