Based on the discussion of contracting's implications for earnings calculation, we model operating cash flows and the formal accounting process by which forecasted future operating cash flows are incorporated in earnings. The modeling enables us to generate specific integrated predictions for: i) the relative abilities of earnings and operating cash flows to predict future operating cash flows; and ii) firms' time series properties of operating cash flows, accruals and earnings. We also predict cross-sectional variation in the relative forecast-abilities and correlations. The predictions are tested both in-and outof-sample and are generally consistent with the evidence. Dechow (1994) shows working capital accruals.
