Are Direct Cash Flow Disclosures Informative? A Revisit

• Main Authors: Orpurt, Steven Francis, ZANG, Yoonseok
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2006
• Subjects: Accounting; Corporate Finance
• Online Access: https://ink.library.smu.edu.sg/soa_research/188
• Institution: Singapore Management University

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.