The Effects of Financial Statement Information Proximity and Feedback on Cash Flow Forecasts

The Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB), in their joint Financial Statement Presentation project, are reconsidering the basic format of financial statements. The Boards' preliminary discussions related to this joint project indicate that they intend to modify the required financial statements to increase the proximity of performance-related information for each reported period, but also to reduce the number of reported periods. We provide evidence related to each of these potential changes by investigating the effects of financial-statement information proximity and the number of periods of reported performance on investors' ability to learn the forecast-relevant time-series properties of reported cash flows and accruals. Our experimental results suggest that nonprofessional investors are able to more quickly learn the relation between current period cash flows and accruals and future cash flow realizations when financial-statement information is presented in a single statement rather than separated into two statements. In addition, we find that nonprofessional investors exhibit lower levels of absolute forecast errors and less forecast dispersion when financial-statement information is unified into a single statement. Interestingly, we find that decreasing the number of periods of reported information from three to one does not negatively impact nonprofessional investor learning and prediction performance, both in terms of forecast errors and forecast dispersion. Overall, our results provide useful information related to the design of effective financial statement presentation format