Further Evidence On The Ability Of FIFO And LIFO Earnings To Predict Operating Cash Flows: An Industry Specific Analysis

摘要

The continuing convergence of U.S. GAAP with International Accounting Standards has brought into question the future use of the LIFO inventory method in the U.S. Since the Financial Accounting Standards Board (2010) has stipulated that earnings should aid investors and creditors in their quest to forecast future cash flows to the enterprise, this research examines whether FIFO earnings or LIFO earnings is preferable, for this purpose, as an aid to ex ante operating cash flow itself, over a three-year forecast horizon. We conclude that ex ante operating cash flows are quite useful in forecasting operating cash flows across industries for up to three years-ahead. We find differing results with respect to the incremental predictive content of LIFO versus FIFO earnings, depending on industry and the forecast horizon. For the Manufacturing industry and the Services industry, LIFO earnings is superior to FIFO earnings for forecasting operating cash flows across the entire three year forecast horizon. In contrast, for the Retail Trade industry and the Finance, Insurance, and Real Estate industry, FIFO earnings is preferable for all three forecasts of operating cash flows. For firms in the Transportation, Communications, Electric, Gas, and Sanitary Services industry and in the Wholesale Trade industry, mixed results are observed. Insufficient LIFO data are available for evaluations of the Agriculture, Forestry, and Fishing industry, the Mining industry, the Construction industry, and the Public Administration industry.