The FASB in SFAC No. I asserted that current earnings
provide a better predictor of future operating cash flow than does current operating cash flow. The few empirical tests of this
assertion have provided mixed results.
This study uses ordinary least squares (OLS) regression and
industry membership as a control measure to test whether current earnings or current cash flow is a better predictor of future cash
tlow. The OLS test results show that current cash flow clearly dominates earnings as a predictor of future cash flow, which is
contrary to the F ASB's contention. Also, the test results confirm that industry membership is an important consideration when comparing the predictive ability of cash flow and earnings.