Predictive ability of annual cash flow under historical cost and

178 Pages·2006·7.09 MB·English

Shiraz T, R, Adam
, ,
0, Cora~, {Hons,) University of Nairobi [Kenya] 1970
fl.;B.A., University of Alberta, I973
THESIS SUBMITTED IM PBRTIBL PULBILZMENT OF
THE BEQOXREHWT5 FOR THE DEGREE OP
DOCTUB OF PHILOSOPHY
i n the Departsent
SXFIOW FBBSER UMXVBBSITP
February 1984
All rights reserved. This work Bay not be
repfoducea in whole or in part, bp photucopy
or other means, without perwission of the author.
APPROVAL
NAME : Shiraz Adam
DEGREE: Doctor of Philosophy
TITLE OF THESIS: Predictive Ability Of Annual Cash Flow Under Historical
Cost And Constant Dollar Accounting
EXAMINING COMMITTEE:
Chairman : Kenj i Okuda
.- ~ ~ ~ s e x
rn -
~haldhi
Senior Supervisor
Daniel McDonald
.
-
-
__CC__LC
Charles E. Cove
-
,,/ /
Eric Noreen
External Examiner
Associate Professor
Graduate School of Business Administration
University of Western Washington, Seattle
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Title of ThesislProjectlExtended Essay
Predictive Ability Of Annual Cash Flow Under Historical Cost
And Constant Dollar Accounting
Author:
(signature)
Shiraz Adam
( name 1
(date)
A BSTBACT
Recent discussi on i n accounting literature has emphasised
t h a t investofs and other users of financial statements are
increasingly interested i n predicting cash flow, The Financial
Accounting Standards Board i n its State~flento f Financial
AccounPrPnqCgggme_rJt&~ colncludes that inf oraa tisn about
enterprise earnings gene~ailyp rovides it better indication about
future cash flow than does information about past cash flon,
This implies t h a t there is a relatiomhip between earnings and
subsequent cash flow, The Board also states that infornation
about past cash flow may be helpful i n predicting cash flow* The
ability of constant dollar earnings or cash flow to predict coa-
stant dollar cash flow has not been adaressed i n the accounting
literature, f h i s study empirically addresses these issues.
The objectives of t h i s sktldy a r e f 1) t o determine t h o
statistical tinte-series properties of historical cost and con-
stant dollar cash flow and develop univariate forecasting models
t o forecast cash flora, (2) to deterraine the direction of any
lead relationship betseen cash Elou and i ~ c o ~aned develop
ntultivariate forecasting nodels, (3) to compare t h e predictive
ability 05 the forecastiag aode3.s vithin each accountin g method,
and (4) t o contpare the psedictive ability of the models across
accounting ntethods.
Box-Jenkins procedures are used to determine the
tiae-series properties of annual cash flow. A randols walk with
d r i f t laudel is used as benchstlark with which to compare t h e
iii
accuracy of other models,
The &a jor conclusioas can be stated briefly. Cash flow
appear t o iolfov either an autoxegressive on: a white noise
process. There is no empirical evidence that income is a leading
indicator of cash flow, Fox one- perioa- ahead predictive abi li t y
tests t h e r e s u l t s are aixed, except the rantiortl walk with a d r i f t
model utilizing historical cost cash flow perforaed as well as
Box-Jenkins univariate nodels u e i li zing constant do1l a r cash
flus. For the two-par-ahead forecasts there is no difference i n
t h e accuracy of the p r e d i c t i o ~a odels when using historical cost
data, !#hen using constant dollar data the Box-Jenkins univariate
ntodels out-perf ormd the randm walk with a dfift aodel. The
Box-Jenkins models utilizing constant dollar cash flow
oat-performed both models utilizing historical cost cash flow i n
the two-year-ahead forecasts.
1 owe much t o laany for their help, advice, encouragemeat
and assistance, Firstly, I would like to thank my senior
supervisor, Professor fi. Shalchi, for a11 the help and guidance
he has given me, Secondly, T would like to thank my program
supervisor, Pfofessos D, HcDonald, Eor a lr na ys being available
and qilling to help s o h e any and a l l psoblerris 3 encountered
during my stay here. #itbout his help I voufd not have survived
long enough to coaaplete stu3iesW I have a l s o gained a lot
pty
froat hi@, f ui13 never be able to repay h i s debt. Thiraly,
mesbers of the faculty and staff, i n both Business
Ailrsinistratdon and Zco.uo&ics, have contzibuted valuable
coarments, insights, other assistance toward the inproveraent of
quality of the thesis, and, particularly, i n osaking tay stay here
a t Silgon Fraser University such a reraa rding and amorable
experience. Pmfessor Tw Var was particularly helpful i n progran
planning, fn order to avoid the r i s k of soBe inadvextent
ortlissions, 3 offer to each and everyone anunyaouslp a heartfelt
thanks. Fourthly, '3: nonld like t o thank Sylvia Faran for typing
the thesis, Doreen Bilkiwson for proof-reading, Terry Longair
and Beverly Trifonidis for valuable cortlments, These friends
accumodated rtly request at e x t r e w l y short notice, fifthly, T
would l i k e t o acknowledge t h e assistance accorded Be by the
University of Bairobi, t h e Canadian International Develop~ent
Agency and Sitrton Fraser University. Finally, f acknowledge a
special and large debt t o rtly wife, Guli, son, Shaffique, and
other members of my family fox their patience, aicouragement,
s u ~ p o r t ,s acrifices and love,
. . . . . .
Cross-Sect.i ona1 'Studies , ,, , , , , , , , ,, , , , ,, ,, , ,, - 79
. .
Univariate Pis@ Specific Ti=-Series Studies , , 25
Box-Jenkins Transfer Function (flulti variate) Hodels ,- 52
.
. . .. .
?lean B ever ting Process ,, , , ,, ,, , , , , , , , , , , , ,, , , ,- 59
vii

LIST OH PBBLES
TABLE PAGE
3 .1 Conditions on Cross-Correlat ions of. ,,P,r,e u.,h,it,e,r,t.e,d ,,,.,,,
Series fcr Causality Patterns 55
. . . . . .. .
4.2 For ma1 Description of Ef for Pleasures ,, ,, , ,, , , 7 3
4.3 Calrmplete L i s t o,,f. .H.y.p,,o,th. e.s.e,s, .u,s ing Indexed
.,.,........,,,,~~II..e,,
Variables 75
.. ..
5.7 Frequency of Nistorical Cost f ash Blow Models ,, , , 82
..
f reguency of Constant Dollar Cash Plow Eaodel s ,, ,, , , 86
Sula~aryo f CrossCorrela tions lijetweea Prewhitensd
-
Incone and Cash Plow Series HistoricaZ Cost
Strmrtlary o f Cross-Correla tions Be-tw een Prewhitened
'Income and Cash Elow Series Constant Dollar
Besults of AWOYB T e s t s on Hist.o r,i.c al C.a st .Ca s.h. .. . . .
-
Flow Bodels APE Retric , , ,, , , ,, , , ,, 105
Results of BMQVA - Tests on His,t.o,r.i,c ,a.l, ,C,o,s.t, C.,a,sh. , - ,.,,.
Flow Rodels SPE Metric 105
Besults of ANOVA- T ests on Consta,n.t Dollar. . C. .a .sh. . .
Flow Hodefs SPE Metric ,, , ,, , , , , f 30
Suatraary of Wilcoxon Signed.- Rank (an,.d, AH.O.V A) Te.s.t s
on Prediction Hodels ,, ,, , ,, , , ,, , , +. *,,, 117