The Decline In Matching And Earnings Ability To Forecast Operating Cash Flows

Abstract

Recent research has documented the decline of matching in financial reporting during the last few decades. The FASB has argued that earnings should provide investors and creditors with an ability to assess the amounts, timing, and uncertainty of cash flows to the organization (1978). This research investigates whether the decline in matching has affected the ability of earnings to forecast operating cash flows. Results indicate that earnings from earlier periods in which matching was better can be used to make more accurate predictions of operating cash flows than can earnings from later periods with poorer matching. Additionally, the more frequent recognition of special items in later periods also damages the ability of earnings to predict operating cash flows.