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Procter & Gamble Co. (PG) | Aggregate Accruals

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Earnings can be decomposed into cash and accrual components. The accrual component (aggregate accruals) has been found to have less persistence than the cash component, and therefore (1) earnings with higher accrual component are less persistent than earnings with smaller accrual component, all else equal; and (2) the cash component of earnings should receive a higher weighting evaluating company performance.


Balance-Sheet-Based Accruals Ratio

Procter & Gamble Co., balance sheet computation of aggregate accruals

USD $ in millions

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    Jun 30, 2011 Jun 30, 2010 Jun 30, 2009 Jun 30, 2008 Jun 30, 2007 Jun 30, 2006
  Operating Assets
chart Total assets 138,354  128,172  134,833  143,992  138,014  135,695 
chart Less: Cash and cash equivalents 2,768  2,879  4,781  3,313  5,354  6,693 
chart Less: Investment securities – – – 228  202  1,133 
chart Operating assets 135,586  125,293  130,052  140,451  132,458  127,869 
  Operating Liabilities
chart Total liabilities 70,353  66,733  71,451  74,498  71,254  72,787 
chart Less: Debt due within one year 9,981  8,472  16,320  13,084  12,039  2,128 
chart Less: Long-term debt 22,033  21,360  20,652  23,581  23,375  35,976 
chart Operating liabilities 38,339  36,901  34,479  37,833  35,840  34,683 
   
chart Net operating assets1 97,247  88,392  95,573  102,618  96,618  93,186 
chart Balance-sheet-based aggregate accruals2 8,855  (7,181) (7,045) 6,000  3,432   
  Balance-Sheet-Based Accruals Ratio, Comparison to Industry
chart Procter & Gamble Co.3 9.54% -7.81% -7.11% 6.02% 3.62%  
  Industry, Consumer Goods 4.50% 12.53% -2.99% 7.72% 200.00%  

2011 Calculations

1 Net operating assets = Operating assets – Operating liabilities
= 135,586  – 38,339  = 97,247 

2 Balance-sheet-based aggregate accruals = Net operating assets 2011 – Net operating assets 2010
= 97,247  – 88,392  = 8,855 

3 Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 8,855  ÷ [(97,247  + 88,392 ) ÷ 2] = 9.54%

Ratio Description The company
Balance-sheet-based accruals ratio Ratio is found by dividing balance-sheet-based aggregate accruals by average net operating assets. Using the balance-sheet-based accruals ratio, Procter & Gamble Co. deteriorated earnings quality from 2010 to 2011.

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Cash-Flow-Statement-Based Accruals Ratio

Procter & Gamble Co., cash flow statement computation of aggregate accruals

USD $ in millions

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    Jun 30, 2011 Jun 30, 2010 Jun 30, 2009 Jun 30, 2008 Jun 30, 2007 Jun 30, 2006
chart Net earnings 11,797  12,736  13,436  12,075  10,340  8,684 
chart Less: Total operating activities 13,231  16,072  14,919  15,814  13,435  11,375 
chart Less: Total investing activities (3,482) (597) (2,353) (2,549) (2,483) (730)
chart Cash-flow-statement-based aggregate accruals 2,048  (2,739) 870  (1,190) (612) (1,961)
  Cash-Flow-Statement-Based Accruals Ratio, Comparison to Industry
chart Procter & Gamble Co.1 2.21% -2.98% 0.88% -1.19% -0.64%  
  Industry, Consumer Goods 2.25% 1.19% 3.25% 7.96% 18.11%  

2011 Calculations

1 Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 2,048  ÷ [(97,247  + 88,392 ) ÷ 2] = 2.21%

Ratio Description The company
Cash-flow-statement-based accruals ratio Ratio is found by dividing cash-flow-statement-based aggregate accruals by average net operating assets. Using the cash-flow-statement-based accruals ratio, Procter & Gamble Co. improved earnings quality from 2010 to 2011.

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May 24, 2012

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