The Financial Accounting Standards

The Financial Accounting Standards Board (FASB) asserts in its conceptual framework that a primary objective of financialreporting is to help existing and potential investors, lenders, and other stakeholders assess the amount, timing, and uncertainty of future expected cash flows (FASB, 1978, 2010). The conceptual framework also states that earnings provide a betterbasis than current cash flows for assessing a firm's future expected cash flows. Earnings' superior ability as a summarymeasure to predict future cash flows is attributable to the timing role of accrual accounting, i.e., the ability of accruals tosmooth temporary timing differences in cash flows. Following these assertions, prior research has examined both (i) therelative ability of earnings as compared to operating cash flows to predict future operating cash flows, and (ii) the incrementalability of accruals beyond operating cash flows in predicting future operating cash flows.1 While prior research shows thataccruals contain incremental information for predicting future cash flows, the evidence on the relative ability of earnings andcash flows for predicting future cash flows is mixed.2 The first objective of our paper, therefore, is to reconcile the contradictory evidence in the literature regarding the relative predictive ability of earnings and cash flows.