Ability of Earnings and Cash Flows in Forecasting Future Cash Flows: A Study in the Context of Saudi Arabia

Nabil Ahmed Mareai Senan

Abstract

We examine a capability of Current Earnings (CEs) and Cash Flows (CFs) and disaggregation of earnings to forecast the Future Operating Cash Flows (FOCF) for 45 Saudi Arabian companies belonging to different sectors from 2006 to 2015. We found significant positive relationship between the CEs and FOCF. Further, we found that the disaggregation of earnings into accruals has greater predictive ability of Forecasting Future Cash Flows (FFCF), while disaggregated earnings into other accrual components has decreased the predictive power. The results of the study are in contrast to the assertion of Financial Accounting Standards Board (FASB) that earnings have the better ability than CFs in FFCF.